Big Brother
European regulators, particularly those in Germany, are under fire over a recent clampdown in short-selling and moves that could hinder alternative investments, such as hedge funds.
The chief executive of the London Stock Exchange, Xavier Rolet, is the latest figure to criticise Germany’s unilateral ban on the ‘naked’ short-selling, or selling stocks you do not own in the hope of buying them more cheaply in the future, as misguided and counter-productive.
Critics say that short-selling actually helps maintain market liquidity and by acting unilaterally, the ban spooked markets and contributed to recent stock market turbulence.
Since the co-ordinated action to save the banking sector in late 2008, markets are now conditioned to expect globally co-ordinated policy measures and many reason that for Germany to act as it did, knowing the markets would almost certainly react badly, it must have strong reasons for such action; hence market negativity.
The action on short-selling is also symptomatic of a wider view in continental Europe that hedge funds, which routinely use short-selling, are a bad thing and need to be curbed.
There is little, if any, evidence that hedge funds are among the fundamental reasons for the global financial crisis, but this is not how many European politicians, perhaps looking for a scapegoat, see it. So a directive from the European Union on alternative investment funds is expected to make it much harder for non-European hedge funds to be marketed in Europe.
Indeed, the US has warned that the directive could be a protectionist measure, as non-European funds may find it harder to gain access to Europe.
London’s status as a financial centre could also suffer, as an estimated 80% of Europe’s hedge funds managers are based in the city, while the lightly regulated funds they manage are domiciled in offshore locations such as the Cayman Islands or the British Virgin Isles.
These funds will be forced to relocate to Europe and face tighter regulation, or concentrate on investors in the US and Asia and ignore Europe as a market.
The AIFM directive, as it is called, currently exists in two different drafts, one from the Council of Ministers and one from the European Parliament.
Over the next few months, haggling and negotiation is expected to produce a single draft, which should be formally approved later this year for implementation in two years’ time.
In the meantime, we could see further signs of division between the more free market approach of the Anglo-Saxons and the rest of the Europe, which sees regulation as a way of returning to stability.
