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In a speech to the Association of the Luxembourg Fund Industry last week, Jarkko Syyrilä, director of international relations for the IMA, said the EU regulator's decision to focus on fund management and not on the true causes of the financial crisis - the banks and their business models - would lead to a "regulatory overkill with grave consequences".

He said: "The EU has decided to tamper with everything and as a result we face severe risks for the business model of asset management as we know it."

Mr Syyrilä acknowledged the directive would provide a European passport to market alternative investment funds to professional investors.

But he said: "The one-size-fits-all approach fits ill with the different fund structures. Running an international asset management business from Europe is made very difficult, if not impossible, imposing European rules to the whole value chain. Many provisions are copied from UCITS but made stricter, which makes no sense, as alternative investment funds are for professionals."

Mr Syyrilä also said Charlie McCreevy, European Commissioner for the internal market and services, had stated his intention of raising the liability of UCITS depositaries as a reaction to the Madoff losses in some UCITS based in Luxembourg and Ireland.

Mr Syyrilä said: "This might force many players to stop providing these services, or raise the fees to unprecedented levels, making many emerging markets funds impossible to run as UCITS.

"It is time for the industry to mobilise itself on lobbying governments, regulators and the European Parliament to make the new rules workable."

Tony Stenning, managing director, UK retail for BlackRock, said: "This draft directive is a backward step for regulation. They are trying to shoehorn everything that is not a UCITS into this vehicle, including things that should not be caught.

"If enacted, this would clearly impact where managers domiciled funds and how we resourced them. It might be easier to move out of the EU, and could mean cost increases.

"More complexity and more cost means less of a deal for the investor. This comes at a time when we are trying to bail out the economy and get investors to save more."

Mark Dampier, head of research for Bristol-based IFA Hargreaves Lansdown, said: "Hedge funds were not the cause of the crisis and do not need further regulation. The real cause was escalating land and house prices and very low interest rates.

"We do not need loads of extra rules. Hedge fund managers are regulated in the UK, and most advisers do not touch unauthorised hedge funds."