The European Commission's (EC) proposed regulations for the alternative investment industry could damage institutional investors' investment returns unless substantial amendments are made, warns Mercer.

The financial consultant says the regulations are too prescriptive, and could be costly and too complicated to comply with. This, Mercer fears, could cause a mass departure of managers from the EU, therefore reducing the overall quality of available providers. The regulations also imply that EU-based institutional investors could be prevented from investing outside the EU, eradicating choice and competition.

"Our pension fund clients agree that the industry needs improvement and better supervision," commented Robert Howie, alternatives researcher at Mercer. "However, they also need choice and value for money. They are worried that restricting the pool of alternatives managers will limit their options for achieving returns and diversifying their investment portfolios.

"Hopefully the European Commission will listen to their concerns when redrafting the directive as some of the current proposals may be counter-productive to improving the industry over the long-term."

Mercer has put together a response to the Commission's proposals, urging them to consider the range of regulatory approaches outside the EU before requiring other countries to adopt the EU's approach to regulation and supervision. The industry needs improving, say investors, in areas that are not uniquely European, and any new regulation should instead reflect the global nature of the industry.

"Given the complexity of the issues that are being addressed and the international nature of the industry it is essential that this piece of legislation better dovetails with the work being done by other national and international bodies," added Tom Geraghty, European head of Mercer's investment consulting business.

Improving and Regulating the Alternative Investments Industry, Mercer's response to the draft legislation published by the EU earlier in the summer, also covers the areas where the consultant believes the industry needs improvement in general.

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