Hedge funds have had it lucky in recent years. These private partnerships for the well-off came through the financial crisis in better shape than other institutions, and a predicted mass implosion of hedge funds never materialized. Indeed, some funds—John Paulson’s and David Einhorn’s funds, for instance—actually prospered by predicting the economic collapse. The recent financial-reform legislation treats them very gently.

But it seems that the hedge funds’ run of luck is coming to an end. A hot regulatory wind is blowing in from Europe, and the hedgies aren’t going to like it one bit. I’m sure they’ll figure out ways to overcome it, as they have with every regulatory initiative, but it may inspire U.S. regulators to act a bit more decisively with hedge funds. And that’s good news for U.S. investors, as hedge funds are being increasingly marketed toward small-business owners and other people of relatively modest wealth, in addition to the traditional hedge fund customer base of mega-millionaires.

It hasn’t gotten much attention in the U.S., but European Union legislators just agreed to some surprisingly wide-ranging measures to regulate hedge funds and private equity funds—including rules that would govern the supersensitive issue of compensation. What makes the EU measure important from an American perspective is that U.S. funds may have to abide by the EU rules—right here, in this country—in order to market their funds to European investors. The draft EU agreement can be found here.

These rules are less severe than originally proposed, but still could have a significant impact. After the rules were published, Andrew Baker, chief executive of the Alternative Investment Fund Management Association, told the London Telegraph that "There is still much in the directive that will be difficult to implement for the industry, and there will be a heavy compliance burden that the industry will have to bear." This is the kind of rhetoric that usually comes out of the hedge fund industry when regulation looms, but this time it may be warranted.

The rules, being phased in through 2015, would impact on U.S. hedge funds and private equity funds. The part that affects U.S. hedge fund managers says that a non-EU hedge fund manager must get a “passport” to market their funds in Europe, and in such situations “should also be required to comply with all the provisions of this directive, so that it is subject to the same obligations as [fund managers] established in the [European] Union.”

Hedge funds, which are usually organized as private partnerships, are notoriously opaque, with some providing only the barest details of their investment strategies even to their investors. A good example of that was Long Term Capital Management, the hedge fund run by former Salomon Brothers traders that went belly-up in 1998 after wrong-way currency bets. Efforts to regulate them over the years have been shot down, and the recent financial regulatory package imposes some minor tweaks—such as a rule requiring registration of hedge funds as investment advisers. That’s fine, except that most large hedge funds are already registered.

But these new European hedge fund rules, which would begin to take effect in 2013, have teeth. To begin with, they would require hedge funds to pay out at least half of their bonuses—the bulk of compensation for most hedge fund managers—in shares, and defer at least 40 percent of bonus payments over three years. This wouldn’t apply just to hedge fund managers or offices who happen to be in Europe, but to hedge fund managers in the U.S.—if they want to get a “passport” enabling them to market to European investors.

Since pretty much all large hedge funds (and many smaller ones) market their funds in Europe, this is going to have wide impact. High pay scales have given hedge funds an edge in attracting talent, and this EU rule would actually put the hedge funds at a disadvantage in competing with bank trading desks in competing for quants and other high-ticket personnel.

Hedge funds would also have to disclose their investment strategies and accounting practices to both investors and regulators. That would close the door on firms engaged in secret “black box” strategies, depending upon how strictly this rule is interpreted. The European rules also would require the funds to disclose the amount of leverage that they use. That is significant because, as the LTCM crisis—which required a Federal Reserve-led bailout—demonstrated, hedge funds are capable of exposing the financial system to a high degree of systemic risk. While hedge funds were not a factor in the 2008 financial crisis, that possibility still exists—and is addressed by the EU rules.

I expect that this provision is going to particularly annoy the hedgies: Fund managers will be required to regularly report to the European authorities “information on the main instruments in which it is trading.” That would give regulators in Europe an early-warning system, in case the hedge funds are engaged in strategies that pose systemic risk.

These new rules are not going to change the world overnight. To begin with, they won’t start to affect U.S. fund managers until 2015, and it’s not clear how closely non-EU fund managers will have to adhere to the EU rules. One potential loophole already in the rules is that they only apply to funds of 100 million euros (about $140 million) in size if they are leveraged, or 500 million euros ($700 million) if not leveraged. So it would seem that U.S. fund managers could escape these rules by starting new funds if they start to get big, or spinning off existing funds into numerous mini-funds, though that would probably be a logistical nightmare.

The irony of this situation is that U.S. hedge funds have always said that they could always “go abroad” if U.S. regulators get too tough. The new EU rules indicate that this is a hollow threat, indeed.