Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable." Read more opinion LISTEN TO ARTICLE 3:16 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Chris Ratcliffe/Bloomberg Photographer: Chris Ratcliffe/Bloomberg

With less than a year to go before Britain exits the European Union, the country's hedge funds find themselves facing a surreal scenario worthy of the novels of Franz Kafka.

The Alternative Investment Management Association, a London-based lobby group representing hedge funds and other non-traditional fund managers with more than $2 trillion of assets, published a study this week on the impact of Brexit on its members. The 22-page report, about 11,000 words long including chapter headings and footnotes, poses more than 130 questions.

The AIMA's laundry list of queries sums up the state of confusion the industry finds itself in over the implications of Brexit. Here's an example, concerning alternative investment funds operating in the European Economic Area:

Will a formal deregistration notification be required for EEA AIFs no longer eligible to be marketed under the Article 32 Regime in the UK due to Brexit? Assuming a formal deregistration notification is required: 2.1. Is advance notice required? 2.2. In what format should the deregistration notification be presented? 2.3. What information should the deregistration notification contain? 2.4. Should the deregistration notification be submitted via the FCA or directly to the home member state competent authority? 2.5. When is the deadline for submission of the deregistration notification? 2.6. What happens if an EEA AIFM with a registration under the Article 32 Regime does not file a deregistration notification?

Underlying the somewhat technical language is a simple -- though Kafkaesque -- issue. As things stand, there isn't a mechanism for funds to transmogrify between the pre- and post-Brexit worlds. Asset managers can't deregister from the current set of regulations and reregister for what comes next -- hence the risk that they'll find themselves in a post-Brexit limbo.

While Britain and the EU have agreed that there will be a transition period after Brexit, that transition needs to foster a genuine change of state, from the existing architecture to a new framework, the AIMA argues. It can't just maintain the current arrangements and then flip immediately to whatever the post-Brexit setup is.

Dominant Player The bulk of Europe's funds-of-hedge-funds are based in the U.K. Source: Preqin

The U.K. is the world's second-biggest market for hedge funds, second only to the U.S. Some 85 percent of European hedge fund assets are managed from the U.K., according to the AIMA; that two-way flow is at risk after Brexit.

With that in mind, the group recommends that "the U.K. should generally opt for an approach that prioritizes openness over reciprocity." In other words, even if the EU plays tough after Brexit in restricting how British-based funds can operate within the bloc, U.K. regulators should continue to allow access for funds based outside of its borders. Avoiding beggar-they-neighbor tactics seems like a sensible approach to take.

To be sure, many industries ranging from aerospace to fishing to sporting goods face similar post-Brexit uncertainties. But financial services regulation is dauntingly complicated. The U.K. government, moreover, doesn't seem minded to make the industry a priority despite its outsized contribution to the British economy. If it's not careful, limbo could be the precursor to death for swathes of the U.K. hedge-fund industry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.