The paper, entitled 'The regulation, taxation and distribution of hedge funds around the globe', says the business environment for hedge funds remains challenging and emphasises the extreme market dislocation over the last nine months. 

While these conditions have led to a focus on survival, the paper suggests that now is the time to create a vision for the future business environment. The industry's immediate challenge, however, is in the form of the draft EC directive whose broad proposals, if adopted, will radically change the way the industry operates.

The potential fallout from the directive as it stands has significant implications for the European hedge fund industry, not least of which are the additional costs, some of which will be borne by the managers and some of which will be passed onto investors.

Graham Philips (pictured), partner, PricewaterhouseCoopers, says: 'Hedge fund managers need to get to grips with the proposed new rules. Even if the rules are negotiated and modified, it appears that there will be legislation of some form; accordingly managers should not underestimate the need for detailed consideration on how the proposals might affect their business model and operations. Our white paper outlines a potential action plan for business model assessment which should help hedge fund managers to begin asking the right questions.

'One point that seems fairly certain is that increased regulation - which will result in revised business arrangements, increased information provision and increased compliance monitoring costs - will bring extra costs. It would be sensible for managers to quantify and evaluate the impact of such costs, either on their own corporate entities or the funds they manage.

'The publication of the proposed EC Directive is in itself causing increased transparency and debate about operational controls. Coupled with the publication last year of the Hedge Fund Standards and the proposals of the US President's Working Group, we are seeing a real increase in requests from Institutional investors and their consultants for managers to commission independent reports on their governance structures and operational controls.'