Fair Fight?
The Alternative Investment Fund Management (AIFM) directive has been likened to the reaction of a man in a bar when a fight breaks out.
Instead of trying to stop the fight, the bystander, in this case the European Commission, which is being egged on by various European politicians, is using the brawl as a chance to punch the person it doesn’t like, in this case the hedge fund industry.
Certainly, this is the Anglo-Saxon, pro-hedge fund view.
It seems the hedge funds clustered around London’s Mayfair district and their supporters regard the directive as a vengeful response to their success, rather a carefully thought-out response to the global financial crisis.
Hedge funds, they would argue, are the canary in the coalmine, warning of the problems in the financial system, not vandals or parasites.
Some hedge funds went short on credit in 2008 and did well, while others were over-leveraged, or long and wrong, or actually long-only equity funds in disguise, and therefore found out by the crisis.
But it is wrong to blame the hedge funds for others’ errors, they believe.
The AIFM directive could hit unregulated, offshore hedge funds, by preventing them from being marketed and distributed to EU investors.
This is how some observers interpret the directive, although it is still be finalised and could be amended substantially before it comes into law, probably two years from this September.
Nevertheless, the US authorities have voiced concerns over the directive and the British government must be worried that London, the home to 80% of Europe’s hedge funds, could be damaged as a financial centre.
Some hedge funds may move onshore, to Dublin or Luxembourg, but some hedge fund experts say the onshore funds, under the UCITS III regime, will be pale imitations of offshore hedge funds which domiciled in places like the Cayman Islands for tax and regulatory purposes, but managed from London.
As a result, institutional investors such as pension funds, and sophisticated individual investors, may see their investment choices restricted and costs raised, in order to pay for additional policing.
The reality is that hedge funds are an easy target for populist politicians who see them as opportunists, taking advantage of macro-economic problems or corporate weaknesses.
The problem is, though, that poor legislation either won’t work or will backfire.
Germany’s recent unilateral ban on naked short-selling triggered a market panic, as investors either decided the regulators were losing their touch, or knew something no-one else did.
And if hedge funds are as powerful as some think they are, merely moving them out of Europe will not stop their impact on the financial markets.
One Comment on “Fair Fight?”
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mototehnika says:
How much money does Wisconsin make a year from speeding tickets, and where does that money go?