On 12th March, the European Commission published the results of the public consultation on hedge funds. Once again, it has been demonstrated that the Commission is giving priority to the interests of financial institutions over public interests. The signs are pointing to regulation “light”
The public consultation gathered opinions on the impact of hedge funds on the financial markets. The focus of the consultation was directed at systemic risks, market integrity and efficiency respectively, risk management and transparency for investors. From 104 replies submitted, 51 came from financial organisations, 22 from public institutions, 8 from individuals and 23 from other “stakeholders”. AK too has participated in the Consultation of the Commission by contributing a well-founded Position Paper. The clear majority of replies from the financial industry is a sign that the hedge fund lobbyists have massively intervened to avoid far-reaching regulations. The feedback of the Commission was thus accordingly dismissive.

In its introduction, the Commission already emphasizes, referring to the de Larosière Report - that hedge funds would not play a significant role in the origins of the financial crisis. The Commission filtered the following core messages from the replies submitted: hedge funds were very heterogeneous; that is why a regulation, which would include all hedge fund “varieties”, be very difficult. A large part of respondents believe that international measures were more effective than European ones. Some stakeholders, however, regard measures at European level as appropriate and necessary. A large number of respondents sees the necessity for a strengthened control of the impact of hedge funds on the stability and efficiency of the financial markets, whereby particular attention should be placed on risk management systems and on special investment strategies (such as short selling). Furthermore, 62 % of respondents come out in favour of an enhanced information exchange between hedge funds and supervisory authorities. In order to counteract potential systemic risks through hedge funds, reference is also made to the necessity of supervising hedge fund business partners (e.g. investment banks or “prime brokers”). In contrast, some respondents point out that the supervision of hedge fund business partners cannot protect financial markets against the cyclic or “herd” behaviour of hedge funds.

Even if the proposal of the Commission on regulating hedge funds and private equity funds will only be presented at the end of April it already emerges that the regulation will not be as far-reaching as has been demanded by AK. There is little sign of EU-wide uniform regulations with respect to registration, responsibilities and clear rules with regard to borrowing and capital requirements, as requested in the AK consultation paper on hedge funds. Also not considered in the summary of responses by the Commission was the AK request for an analysis of the impact of hedge funds on the real economy and not only on the stability of the financial market.

Further Information:

AK-Consultation paper on hedge funds

Summary of responses to Hedge fund consultation paper