Faced with a possibly daunting tax bill brought on by new proposed levies on offshore funds, U.K. hedge fund managers that trade carbon emission credits and property indices may just stop handling them. “Managers were trading carbon emission credits and just assuming it looked like any other derivatives transaction,” Martin Cornish, a partner at the law firm Katten Muchin Rosenman Cornish, told FT, “but Revenue & Customs cannot interpret the rules to include them” in the exemptions as they have gold bullion and real property. “The Armageddon scenario is that managers could lose exemption for all purposes, and the tax bill could be 30% of the fund’s profits.” Early reaction to the proposals seemed to suggest the rules would have hedge fund managers pulling up anchor from their offshore abodes off the U.K. for friendlier waters. But that may be a smaller deal than first thought. “One of the reasons people have been flocking to London is that we have a good taxation regime,” Cornish said. “In an awful lot of European financial centers you would be worse off.” There could be an exodus of specialist carbon credit managers, Cornish predicted in his FT interview, “but I’m not sure that this is a large part of most funds’ business.” There’s one more sticky issue in the mix. The proposals themselves, says Neil Oliver, who heads Ernst & Young’s hedge fund practice, “muddy the waters” on the test used to determine whether a hedge fund manager and the fund are independent, which could make it difficult to determine who gets exempt, regardless of what instruments they trade.