A demand which has been coming for many years from workers’ representatives is now finally entering a new phase. The Commission has initiated a public hearing on hedge funds.
It has been a demand for many years from workers’ representatives in the member states but also at the European level: to finally establish binding regulations for hedge funds and also for private equity funds. The European Parliament clearly argued for increased regulation of hedge funds and private equity funds at the start of autumn of last year. Particular credit is due to the Danish Social Democratic MEP Poul Nyrup Rasmussen, who long before the start of the financial crisis consistently called for hedge funds to be no longer left without regulation. Then in September last year, on account of the huge effects of the financial crisis, the time had come to find majorities in the European Parliament too. Rasmussen’s report and also that of the German conservative MP Klaus-Heiner Lehne were thus accepted with clear majorities. Not only is European regulation of hedge funds and private equity demanded here, there are also other important demands such as the regulation of short sales which play a decisive role in causing the volatility of the financial and commodity markets.

For many years the European Commission and the responsible Irish Commissioner for the Internal Market and Services Charlie McCreevy wanted to know nothing of regulation in the financial sector. It was claimed the finance industry was capable of regulating itself, it did not need any intervention from the European legislator. After it became clear with the financial and economic crisis how dangerous this approach of self-regulation is, there now slowly seems to be a change of thought at the Commission.

And there are more than enough reasons for a change of thought. The consultation document of the Commission on hedge funds lists several selected facts which are more than revealing. Since 1990 the investment volume covered by hedge funds has increased 50 fold. In recent years more than half of the daily turnover on the stock exchanges has come from hedge funds. And hedge funds were among the main buyers and sellers of credit derivatives: so those types of securities which played a decisive role in bringing about the financial crisis and today are still going down like a lead balloon in the balance sheets of the banks.

And despite this huge influence on the financial system and the associated systemic risks there are virtually no regulations for hedge funds. The reason always given for this was that only the rich and super rich would invest in hedge funds anyway, and they know what they are doing. That this is not true for many reasons is shown not only by the fact that more and more institutional investors like pension funds looking for a golden return are among the investors in hedge funds. It is also the bold investment strategies of the hedge funds which have the potential to drag “traditional” investors into the abyss. Their financing is based on a very high proportion of credit compared to their own equity, and the use of short sales and derivatives is part of their standard repertoire. So when – as has been the case recently – crises occur, this deliberate use of highly-risky speculation strategies endangers not only the hedge funds themselves but also their investors, creditors and the entire financial system.

So it is high time that there are finally regulations for these high priests of financial capitalism too. The consultation of the Commission is the first step here, which was much too long in coming. It must also be noted critically that the Commission is providing only an extremely short amount of time for participation in the consultation for such an important issue. And the MEP Rasmussen is also calling on pressure groups and civil society to take part actively in the consultation so that the Commission does not only receive the arguments of the well-organised financial lobby.

For further information:

Rasmussen Report

Lehne Report

Consultation of the Commission on Hedge Funds

Press release of the Commission on the Consultation on Hedge Funds