With more than 18 months of discussion and consultation, and 30-odd drafts, you might think that the EU’s Alternative Investment Fund Manager (AIFM) directive would be a pretty good piece of regulation.

And after the success of the UCITS regulations as a pseudo-global standard, who could argue with attempts to improve and harmonise regulation of alternative investments? After all, two-fifths of UCITS funds sold in the world are sold outside the EU, according to the Alternative Investment Management Association.

But this latest directive—which could well be implemented in 2013—has plenty of critics. Increasingly, asset managers might have to choose between being domiciled inside the EU to access the continent’s investors, or outside to avoid regulation.

Richard Saunders, chief executive of the Investment Management Association in the UK, calls it the Appalling Investment Fund Managers directive. As the global financial crisis worsened, European politicians realised that ‘Something Had To Be Done’, he says. And those politicians also had to be seen doing something—so they hijacked the directive, and gave it a protectionist and populist flavour.

“The European Commission’s normal painstaking study of the facts, followed by careful analysis of the different policy options, was tossed aside,” Saunders says.

“As a result all sorts of innocent bystanders, like investment trusts, real estate funds and many other types of fund, were brought into its scope in ways that simply did not fit the way they were set up.”

In Hong Kong, Paul Smith, the chief executive of Triple A Partners says that the directive would be good for Europe—but only in the short term. He says already some Cayman Island funds have moved to Luxembourg, and accessing customers within the EU would become cheaper.

“But, in general for the mid-to-long term, it’s a bad thing. It sends out the wrong signals to Asia. The Europeans have nailed their colours to the mast, saying this is ‘Fortress Europe’.

Smith adds, “Mainland Chinese asset managers setting up in Hong Kong are going to have to use a European venue for their global products. It’s embarrassing, as Hong Kong is supposed to be China’s route to the world.”

There’s still a lot of work to be done before the directive can take effect. “The crucial parts of the text still has to be filled in,” says Jiri Krol, AIMA’s director of policy and government affairs.

Once EU finance and economics ministers have approved the text, EU members have two years to amend or introduce national laws to implement the directive. Application and scope will be reviewed in 2017.

“At each stage of the process there is the risk that its requirements could become onerous,” Krol says. AIMA is wary of prescriptive rules raising costs. “It could become too expensive to run a small fund.”

The writers of the text have resisted the pressure to ban reverse inquiry, also known as passive marketing. That means funds from outside the EU will still be able to sell products to European investors who contact the managers.

The new European Securities and Markets Authority (ESMA) will play a key role over the next few years. The directive allows for an EU-wide passport for alternative fund managers, allowing them to market their products anywhere in the union as long as they are approved by one member country’s regulator. ESMA will recommend several years after the adoption of the directive, whether the scheme should be adopted.

Proposals for a similar Asian regional funds passport have been made for years. Paul Smith hopes that governments and regulators will take them seriously: “We are lobbying the Hong Kong government to have a pan-Asian passport, controlled by Asians for Asia.”

The directive might precipitate some much needed reforms and cross-border cooperation. “The EU rules will not just govern product structures, but who can distribute them, and who can service them, what can go into a product, how positions need to be marked,” says.Smith: “Is it in your interests if your entire asset management industry is in the hands of the Europeans?”