Hedge funds back on Ecofin radar

EU finance ministers will re-examine the need to bring greater transparency to the hedge fund industry at a meeting next month (14 September).

Member states have urged the Portuguese presidency to place the issue back on the EU’s agenda following recent wobbles in world financial markets caused by the US sub-prime mortgage crisis.

The finance ministers are scheduled to meet informally in Porto, Portugal. The informal meeting, which will also be attended by Jean-Claude Trichet, president of the European Central Bank (ECB), and the governors of national banks, already had on its agenda a discussion of crisis management.

Germany made a two-pronged attempt to push for tougher controls on the hedge fund sector earlier this year, taking advantage of its position at the helm of the EU and G8. In May, EU finance ministers rejected initial proposals for a global database of hedge fund investments in favour of a non-binding, industry-led approach. Further efforts by German Chancellor Angela Merkel to push for a global voluntary code of conduct at June’s G8 summit in Heiligendamm were thwarted by the US and the UK.

But this summer’s crisis has given member states cause for further reflection. Hedge funds have come unstuck in the sub-prime mortgage crisis, brought about when home-buyers with poor credit histories now being dubbed ‘ninjas’ (no income, no job, no assets) defaulted on loans that had been repackaged and sold down the financial food chain. In the resulting chaos, the ECB and the US Federal Reserve have pumped hundreds of billions of euros and dollars into the markets to avert financial meltdown.

A Portuguese diplomat said that the presidency would re-examine the issue with an open mind despite previously expressed scepticism about the need for regulation. "We won’t go in with prejudices. We won’t go in as the presidency saying we don’t want to change as I’m sure nobody will go in saying we must have change," he said. "Everyone would be happy with more transparency. On that we probably agree. But on how far we should go? That’s where there’s a lot of scope for discussion."

The diplomat said that certain member states had raised the issue with the presidency ahead of next month’s meeting. French President Nicolas Sarkozy would be a staunch supporter of any additional efforts made to identify weaknesses in the global financial system. While campaigning for this year’s French elections, he talked of "moralising" financial capitalism and attacked "aggressive funds". In a letter sent to Merkel this month, Sarkozy called on G7 finance ministers to submit proposals on how to bolster market transparency in preparation for a meeting in Washington in October.

A German diplomat welcomed moves at EU level to re-open the debate. "This transparency initiative, more generally for international financial markets, was our initiative at the beginning of the year and we see this as confirmation that we were right even though there was not much inclination at the G8 to discuss it." He stressed, however, that hedge funds were only partly to blame for current turbulence.

Florence Lombard, chief executive of the Alternative Investment Management Association, said that hedge funds were the "consumers" rather than the "producers" of the current credit crisis. "Traditional long-only fund managers, investment banks and commercial banks have all been affected," she said. "Some hedge funds have benefited from these developments through careful investment and anticipation and hedge funds generally have a strong track record of providing capital preservation and returns in distressed markets."

MEPs on the European Parliament’s economic and monetary affairs committee have called a special hearing with Trichet on 11 September to discuss the state of the financial markets and the sub-prime crisis. The committee is keen to discuss increased hedge-fund and private equity regulation, and the role of credit rating agencies. In parallel, Charlie McCreevy, the internal market commissioner, is to launch an investigation into the role played by credit ratings agencies in the current crisis.

EU finance ministers will re-examine the need to bring greater transparency to the hedge fund industry at a meeting next month (14 September).