European pension fund managers today attacked Brussels for drawing up new legislation from "out of the dark" which they claim will cost the industry €1.4 billion a year in costs and reduce returns for investors.

The remarks were made this morning at the first public hearing of Europe's proposed directive designed to govern hedge funds and private equity.

Under the current terms of the EU directive, which has been drawn up to try to prevent a repeat of the global credit crisis, hedge funds would have to seek specific clearance from Brussels if they wanted to increase their borrowing levels and would also be required to hoard more capital. There would also be strict bans on foreign ownership.

At the hearing of the Committee on Economic and Monetary Affairs in Brussels, Gerben Everts, the head of regulation at Algemene Pensioen Groep (APG) - which has €230 billion worth of assets under management - complained that "We have not been heard, [excluded] from working groups on this directive. This directive is coming out of the dark."

He argued that the current proposals would be so onerous, they would lead to higher costs and lower returns at a critical time for the investment community which is grappling with the combined effects of slowing economic growth, an ageing European population, and rising unemployment.

However, Jean Paul Gauzes, the European Parliament rapporteur who opened the hearing, issued a stark warning to hedge fund managers, private equity players and the wider asset management community.

He said: "Nothing can be left out of regulations now, even if hedge funds did not cause the crisis."

He added that he had been swamped by lobbyists who have sought meetings with him to try to shape the future legislation for their own clients' benefits: "The lobbyist involvement has been unusual and extremely high."

He also cautioned financiers that he had no interest in working with lobbyists who wanted to dramatically water down the directive.

M Gauzes' comments come after Lord Mandelson, the Business Secretary, told UK hedge funds and private equity groups to beef up their lobbying programmes as part of the fight by the City to fend off the more onerous parts of the proposed legislation.

During the summer, the peer also sought to help private equity and hedge funds by insisting that he would try and redraw the terms of the debate over the directive, and concede very little to Europe.

Both Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor, want hedge funds to be very heavily regulated. They believe that the credit crisis was exacerbated by the trading behaviour of hedge funds and are keen to impose a new regulatory regime which will change the way that they do business.

However, in Britain, the City is deeply anxious about the proposed legislation with a number of hedge funds arguing that they will go bust if the directive goes ahead in its current form. Unlike France and Germany, the UK government derives substantial tax revenues from its hedge fund industry, paying an estimated £30 billion to the Treasury last year.

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