EU cool about trimming hedge funds

By Aoife White

Date: 19/05/05

EU authorities have reacted coolly to German calls for greater European regulation of hedge funds.

The European Commission said its paper on asset management in July would look at all structural challenges facing the industry in the future, including unharmonised aspects such as hedge funds.

"All options are open. We will look at the responses to the paper carefully and consider how to address issues that are identified. It is much too early to say whether or not some of these could be addressed by proposals for new regulations," said a Commission official.

German finance minister Hans Eichel told a regional German newspaper, the Passauer Neue Presse, that Europe should follow German rules on transparency which would minimise the risks of "certain black sheep".

His comments came after Franz Müntefering, the chairman of the ruling Social Democratic party (SPD), described hedge funds "as a plague of locusts that strip companies bare and move on". Welt am Sonntag reported that the finance ministry was thinking of taking away hedge funds' voting rights for an initial period after they buy shares in a company. Financial Times Deutschland quoted government sources as saying hedge funds should be forced to reveal their investment strategy.

German Christian Democrat MEP Alexander Radwan, a member of the European Parliament's economic and monetary affairs committee (EMAC), said Europe needed minimum standards to harmonise patchwork legislation across the 25 member states. The Commission had been "very defensive" and reluctant to regulate the area up until now, he said, even though the highly speculative funds were increasingly being sold to "the man on the street".

British Conservative MEP John Purvis wrote an own-initative report on hedge funds which was adopted by EMAC in January 2004. He said the Germans were "over-exaggerating the risks and what the benefits of over-regulation should be".

"If the regulatory burden is too heavy, they will stay offshore," he said. Discriminatory taxes and regulations encouraged funds to base themselves in tax shelters outside the EU or low-tax member states such as Ireland and Luxembourg.

Hedge funds were a "very sophisticated form of investment" that could offer large amounts of capital to the economy. Purvis said he would like to see rules on how the investments were sold and distributed.

City of London spokesman Greg Williams said large investment flows across borders were a good thing. "Hedge funds are an important phenomenon which help with liquidity and Europe's overall global competitiveness," he said.

The German row over hedge funds was sparked by a British hedge fund's veto over Deutsche Börse's botched bid for the London Stock Exchange (LSE). The Children's Investment Fund Management exercised its shareholder rights under German law even though it had only held 8% of Deutsche Börse since January 2005. The bid's failure was seen as a major loss to Frankfurt as a financial capital as the SPD faces a crunch election in Nordrhein-Westfalen.

Article reports that EU authorities reacted coolly to German calls for greater European regulation of hedge funds. The European Commission said its paper on asset management in July 2005 would look at all structural challenges facing the industry in the future, including unharmonised aspects such as hedge funds.