Hedge funds and private equity firms from the US, Canada, Japan, Singapore and Hong Kong should be allowed to market themselves in the European Union.

That’s the view of EU securities watchdog ESMA, which is recommending the introduction of an alternative investment fund ‘passport’ currently only available to EU entities.

Under the new plans, managers outside the EU have to qualify for a passport to continue offering services to investors across Europe, a procedure the UK may have to follow depending on Brexit negotiations.

Meanwhile ESMA has decided to keep the Cayman Islands and Bermuda waiting. A decision had been expected at the end of June.

Most hedge funds are set up on the islands. So, as it stands, the decision it means these fund's cannot access the AIFMD passport.

For the Isle of Man ESMA said that the absence of an AIFMD-like regime makes it difficult to assess whether the investor protection criterion is met.

There are no significant obstacles to the AIFMD passport being given to Australia, the regulator added, providing the Australian Securities and Investment Committee (ASIC) extends a ‘class order relief’ to all EU member states.

When it comes to the US, ESMA considers there is no major competition or market disruption worries for funds marketed by managers to professional investors which do not involve any public offering.

However, in the case of funds marketed by managers to professional investors which do involve a public offering, a potential extension of the AIFMD passport to the US risks an uneven playing field between EU and non-EU AIFMs.

“ESMA's decision on the US is pretty hedged. Though, if approved, it does mean 40 Act funds may now have a passport route into the EU,” said Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman.

The extension of the AIFMD passport still requires EU parliamentary approval.