Hedge funds and private equity could face more than 3 billion euros of costs while investors could see fund choice shrink by up to 40 percent due to proposed new EU rules, a Financial Services Authority report said.

The analysis of the impact of the Alternative Investment Fund Managers (AIFM) directive conducted by Charles River Associates and commissioned by the FSA found it could load one-off costs of up to 3.2 billion euros ($4.77 billion) on the affected parts of the funds industry.

Hedge funds would bear the brunt of the costs, shouldering 1.4 billion euros in additional costs in order to comply with the new directive.

Private equity firms could see one-off costs of up to 756 million euros and bear the largest ongoing compliance costs -- 248 million euros -- the study found.

The number of hedge funds available to European investors could shrink bt 40 percent, while the number of private equity funds could fall by 35 percent.

($1=.6702 Euro)

(reporting by Simon Meads; Editing by Hans Peters)