Canadian hedge funds may lose more than 20 percent of their business if the European Union approves a proposed directive restricting foreigners' ability to sell into the EU, a top fund manager said on Thursday.

Gary Ostoich, president of Toronto-based Spartan Fund Management and the chairman of the Alternative Investment Management Association (AIMA) in Canada, said his group has communicated its concerns to its European counterparts, where the UK branch of AIMA is actively lobbying to amend the draft.

If the directive were to come down tomorrow, we would lose 20 percent of our business, said Ostoich.

British pension funds are also exerting pressure to change proposed EU rules that would impose tighter regulations on the hedge fund and alternative investment sector.

The draft legislation affects hedge funds, private equity funds and real estate products, and demands that funds register and disclose more information to regulators, such as levels of debt.

The directive, announced in April, also restricts the ability of non-EU managers to sell funds in Europe.

Europe definitely, next to the United States, would be the largest purchaser or one of the largest purchasers of Canadian funds, Ostoich said in an interview from his Toronto offices.

So it would have a big impact on any Canadian adviser who has offshore funds. It would be material.

Under the draft provisions, an EU alternative investment fund manager that is authorized in one member state, but wants to market a non-EU fund to an EU investor in another, would only be able to do so if the latter member state has entered into an agreement with the non-EU country to share tax information.

AIMA argued in a position paper published last month that the conditions imposed on non-EU fund managers mean it would be highly unlikely that any would be able to comply.

Lobbying by the industry is seen as opening the door to amendments to the EU directive, although it is unclear what the final EU draft would look like.

There is now a broad consensus among European policymakers that the directive does need a lot of work and that there will be significant revisions, AIMA Chief Executive Andrew Baker said in a statement issued in London.

The question, of course, is what will replace what is currently in the draft directive.

(Reporting by Pav Jordan; editing by Rob Wilson)