Hedge funds face drastic EU pruning

New EU rules may seriously cramp hedge funds' style - unless George Osborne can stop them...

Last Updated: 31 Aug 2010

While Westminster has been busy sorting out the hung parliament this week, EU regulators have been rushing through a stringent new set of rules to clamp down on so-called alternative investments – hedge funds and private equity houses in essence.

The new rules are likely to be voted in early next week at a meeting in Brussels – and only our brand new (and some might say rather wet behind the ears) Chancellor George Osborne can do anything to stop them.

The package on the table is based on a requirement for all such funds from outside the EU to acquire a ‘passport’ to operate with the area.

And the passports will only be granted to those institutions which provide extensive information about their investment positions, and agree to defer as much as half of any prospective bonuses for two or three years.  Private equity partners will also face limits on the amount of capital they can withdraw from firms they have invested in.

Hedgies and private equity barons would rather sell their grannies than provide this kind of info to nosey parker regulators. We predict that sparks will fly.

The regulations are a reaction to widespread outrage on the continent at what might be described as ‘un-European’ financial activities during the recession, and more recently the Greek debt crisis. Especially by hedge funds, part of whose MO is as we know, betting on the likelihood that things which are already failing - companies, securities, currencies – will continue to do so, and perhaps at a faster rate. All too often such activities can become a self-fulfilling prophesy.

The Germans and French are particularly keen that something be done about this, it seems. Probably not least because they foresee, not unreasonably, that if they don’t then a substantial chunk of the vast Greek/Euro bailout package agreed last week will be trousered by the hedgies.

Of course, even though they are hardly the most popular of individuals at present (not helped by the fact that they are as a breed singularly unwilling to explain exactly what they do in terms ordinary mortals can understand) hedge funds and private equity houses do have an important role. A lot of companies, and a lot of jobs, reside in the private equity sector these days, and a lot of the money they invest comes from us – via pension funds, banks and other corporate investors.

And those who say that the rules are essentially protectionist, an attempt by the EU to keep the grubby mitts of free-wheeling capitalism off their patch, may have a point, too. With the travails of Greece and the Euro, and the Spanish economy now heading into deflationary territory, arguably what’s needed is more economic activity rather than less.

Either way, Osborne, a man who didn’t even know he’d got the job ‘til a couple of days ago, faces a pretty sticky wicket. If he can’t get some pretty major last-ditch concessions, do they do what the Tories would almost certainly like to do, draw a line in the sand and ignore the ruling? With 80% of EU hedge funds based in London the rules will be dead in the water if they do. Or do they take a leaf from the much more pro-Europe LibDems and sign up? Watch this space.

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