POUL RASMUSSEN is a 65-year-old socialist politician who has become the scourge of the European alternative finance and investment community.

For five years, the former prime minister of Denmark has been on a one-man crusade to restrain the private-equity and hedge-fund traders who he believes are at the heart of the credit crisis.

Rasmussen has lobbied the European parliament to toughen regulation of the industry. And it appears his campaign finally gained some traction last week, though Ramussen hopes this is only the start.

The European Union published a harsher than expected directive on how the industry should be governed and its proposals included radical new rules on areas ranging from disclosure to fundraising.

Days later, the chairman of the Securities and Exchange Commission (SEC) Mary Schapiro warned that it was “probably not enough” for US hedge funds to only register with the SEC.

If the EU proposals are implemented – and there is still two years of consultation – they could cut a swathe through Britain’s hedge funds and buyout firms.

Rasmussen said: “Their time is over. Their days of freewheeling are gone.

Private equity and hedge funds need to realise that we are in a society where the priorities are not about them anymore. Greed is a human characteristic but it has to be restrained before things go wild.”

The threat of the EU directive has caused consternation in London – home to a high percentage of Europe’s hedge funds and private-equity groups. The big concern is whether it will drive firms to places such as Switzerland, which have more benign regulatory regimes.

The backlash from UK firms was unanimous: the proposals are punitive, anticompetitive and disadvantageous to funds operating in Europe as they would prevent non-European-domiciled funds – which constitute the majority – from marketing to EU investors.

Kinetic Partners, a consultancy that helps hedge funds move to Geneva, has been inundated with calls from London-based managers looking for advice. David Butler, founder of Kinetic, predicted that up to 150 funds could go. “Call it the twin pillars of doom,” he said, “Put together the UK tax changes and what the ogres in France and Germany have created and you will see a mass migration.”

Other notoriously secretive hedge funds which have never before risen to government baiting were spurred into action. Almost all of the larger firms have teams of lawyers examining the issues and some are planning to lobby the government and Europe.

Despite the anger from the industry, Rasmussen believes the directive should be much tougher. “Just when you thought the greed and excessive risk-taking of the speculators had finally discredited light-touch regulation of financial markets, the European Commission has come forward with super-light touch regulation,” he said.

The Dane’s battle with private equity stems from the highly-leveraged buyout of the Danish telecoms company TDC in 2005. The assets were carved up, almost 10,000 people lost their jobs and the five private-equity firms – Apax Partners, Permira, Blackstone, KKR and Providence Equity – walked away with millions.

Rasmussen cannot forget it. A Lutheran born into a working-class family, he paid his own way through university, where he studied economics, by taking part-time jobs. One source in Brussels described the former trade unionist as “incredibly charming” but added “his whole experience is coloured by one experience. He has decided that private equity is the spawn of the devil”.

Hedge funds were enveloped into the grudge as his obsession with the darker side of investing grew. He has even written a book, In a Time of Greed, which is critical of the role hedge funds and private equity have played in the global economy.

In the past year Rasmussen has become more influential in Europe, where he is a member of the European parliament and leader of the Party of European Socialists. His power has grown exponentially as the current EU president, José Manuel Barroso, may need the socialists’ support should he seek a second five-year term.

There is speculation that Rasmussen, who counts the vociferous American Democrat Barney Frank among his allies, could succeed Barroso. If that were to happen, the private-equity industry and hedge-fund sector would be in for an even ruder awakening.

One private-equity insider could hardly contain his fury: “We have this one bloke who is manipulating the whole of the European power base to serve his agenda – an agenda which he has formed on the basis of one experience with one company in one country.

“He happens to sit in a powerful place and now he is venting his anger on the industry. Regardless of the outcome, that’s just bad government – it’s ridiculous.”

The industry has deep concerns about the impact of the proposed regulatory changes. There are fears that the costs and levels of disclosure will be damaging to all, while the balance-sheet capital requirements could destroy the smaller and mid-sized players.

Jon Moulton, founder of private-equity group Alchemy, said: “If the proposal was enacted in its current guise it would represent a very substantial, pointless overhead on the industry and would restrict activity.

“It would favour the large funds because it would be a cost-per-company rather than a cost-by-size, so paradoxically it would tend to help the mega-funds that Mr Rasmussen hates the most.”

A chief executive of a fund of funds business described the proposal as a “mish-mash” of rhetoric. “It is not intellectually sound and is simply reflective of a deep-seated envy in Europe over the success of the City.”

As the chorus of criticism grew so, too, did fears that the directive could drive funds out of London.

Upping sticks will be more difficult for the larger players that employ hundreds of people and rely on London’s support system of advisers and lawyers. They, along with the industry’s trade associations, are poised to engage in a lengthy battle with Rasmussen and the commission as each side vies to shout the loudest.

Proposed new rules

All hedge-fund managers and buyout funds based in the EU overseeing portfolios worth more than €100m must be authorised and subject to supervision.

Only authorised managers operating funds domiciled in Europe can freely market to institutional investors throughout Europe.

Non-EU domiciled funds can be sold across the EU three years after the law takes effect but only on condition they meet tough regulatory standards.

If any hedge fund uses leverage, the manager must notify the fund’s investors and the regulator.

Private-equity firms will have to disclose details about the company’s performance to stakeholders.

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