LONDON - BRITAIN financial services minister hit out on Tuesday at draft European legislation that would subject hedge funds to tighter regulation and accused fellow EU partners of seeking to make 'political capital' from the issue.

Hedge funds based in Britain manage 80 per cent of all European assets in the industry, according to British government figures, and London is keen to fend off rules that could harm the sector or drive it overseas.

Many continental European countries, notably France, are pushing for reforms that would force greater transparency and limitations on borrowing on hedge funds in the wake of the global financial crisis.

'It is perhaps easy for other European countries to make political capital out of demanding intrusive regulation of an industry of which they have little or no direct experience,' Paul Myners told the Alternative Investment Management Association in a speech.

'But it is woefully short-sighted, bordering on a weak form of protectionism.' In a fiercely critical speech on the draft EU rules, he pledged that British officials would lobby on behalf of the hedge fund industry in 'more than a dozen key capitals.'

'It is clear to us all that the draft directive is flawed. This was perhaps inevitable given the inadequate process by which it was developed, driven by political concerns,' he concluded.

Hedge funds would have to meet increased minimum capital requirements and limits on borrowing among a number of measures contained in the proposed EU legislation.

Mr Myners also said that 'funds and private equity have not been central to the financial crisis,' which he claimed had been acknowledged by key policymakers in Europe. -- AFP