EU Set to Regulate Hedge Funds

I’ve written before about being in favour of a common EU-wide approach to financial regulation and crisis management. So, on the face of it, one might imagine that I’d be happy about the news that EU finance ministers are about to approve a proposal for EU-level regulation for Alternative Investment Fund Managers (AIFMs) including hedge funds and private equity firms. However, looking at the proposals, I’m not too positive about them.

I’m all in favour of registering these firms and collecting statistical information on the exposure that banks have to them. But EU the proposals seem to go well beyond this, including bans on selling to retail investors, limits on selling non-EU-domiciled funds inside the EU, the enforcement of capital requirements etc. I’m not sure that these proposals will ultimately do much other than encourage funds to set up outside the EU, for instance in Switzerland.

The documents associated with the proposal admit at various points that hedge funds did not cause the financial crisis. But other material says stuff like “the crisis has underlined the extent to which AIFM are vulnerable to a wide range of risks.” There seems to be an element here of trying to have it both ways. There is most likely also an element of being seen to do something by picking on an area that, as the BBC news story puts it “many say played a part in the global financial collapse” – even if what many say isn’t particularly accurate.

7 replies on “EU Set to Regulate Hedge Funds”

On the other hand, allowing casino finance to continue is not an option. It’s as lunatic as playing Russian roulette alone and with bullets in all the chambers. To not act is to guarantee that something terrible will happen.

For the same reason a country whose finances have collapsed twice in a generation should be hugely supportive of EU scrutiny of our budgets, as 60% were in an on-line poll:

Again, to not take drastic action against our casino political class is to guarantee disaster.

It’s certainly true that the hedge funds weren’t holding the bag the most recent time the music stopped, and that they’re an easy target for political indignation whatever the weather. But hedge funds did play a role in the global financial collapse, no? LTCM increased the moral hazard attending the failure of big US financial firms and, more importantly, induced Greenspan to sell his put one more time. Didn’t Magnetar Capital and Paulson & Co. also contribute directly to the most recent crisis, by going short US non-prime in such a way as to encourage the market as a whole to go long – bringing about basically the opposite of price discovery?

Finally, it’s reasonable to assume that the next financial crisis will not be precisely like the last (current!) one, and plan appropriately – avoid fighting the last war, in the words of the cliché. In particular, moral hazard apparently didn’t have that big an effect on the decisions of the financial industry up to Lehman, but that’s almost certainly not true anymore. As long as TBTF remains enthroned, then TBTF will be the thing to be, and hedge funds can certainly do TBTF – LTCM already did.

Two questions:

Do EU finance ministers really know/understand what they are doing (in any area – not just this one)?

What makes these people think AIFM’s aren’t already setting up (have already set up) offices in Switzerland?

All this will do is make them move. It won’t solve any of the perceived problems.

Isn’t it likely that retail investors will gravitate towards hedge-like strategies using UCITS ‘wrapping’ and that non-EU funds will come onshore to get access to European markets? I’m pretty sure a lot of people in the IFSC are counting on both happening.

About a month ago a number of high ranking US gov’t officials fired a few pre emptive shots across the European Commissions bow. The message was hands off hedge funds or you will face retaliatory action from Wall Street and Washington. The US is banking on being propped up by China as it wages war on the Euro. Britain will be right there alongside aiding and abetting. My money is on Europe.

It’s the usual, treat the symptoms (hedge funds) and not the cause, and kick the British while they’re at it, presumably only 1 country will be voting against!

Given the UK gov weren’t foolish enough to jump into the eurozone, they are in a much better position if a 2 tier europe emerges.

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