There’s no shortage of resentment in London against the EU’s planned directive on hedge funds, but the Hedge Fund Standards Board on Monday said the rules could actually create one of the problems they’re set up to avoid.

At a CSFI debate at the beautiful Innholder’s Hall in the City, HFSB executive director Thomas Deinet pointed out that, as seen all too often in the credit crisis, in falling markets a fund’s leverage automatically rises.

Imposing leverage limits could mean funds breach these levels, forcing them to sell assets to reduce borrowing and exacerbating the market problem, hence exacerbating systemic risk.

“There’s a systemic concern,” he said. “A lot of managers will be hit by leverage limits and will be forced to sell, which is when you want people to hold onto assets.”

However, there seems a growing consensus that the draft will be watered down. Both the HFSB and AIMA think a “moderately satisfactory” (in the words of AIMA CEO Andrew Baker) compromise is achievable.

And at a Katten Muchin Rosenman Cornish breakfast briefing today (this time at the Capital Clubin the City), Martin Cornish said areas of the rules covering valuators and capital requirements could be eased.

However, given that U.S. proposals could cover managers with $25 million or more in assets, he sees scope for the directive to be exteneded to cover much smaller funds.