McCreevy bets on hedges

Depending on whom you believe, hedge funds are either democratic instruments reining in power-crazed company boards or blood-sucking locusts. These two different takes on the increasingly divisive issue are not necessarily mutually exclusive. Could it be that there is a little bit of truth in both?

Hedge funds intruded on this month’s informal meeting of EU finance ministers (8-9 September) when John Monks, general secretary of the European Trade Union Confederation, launched a scathing attack on the industry. After a European Commission review of the EU investment fund industry published in July, Internal Market Commissioner Charlie McCreevy hinted at a light-touch approach to regulation of the booming sector.

"The main thrust of my attack was that they require too much too quickly from people who invest," says Monks. "Companies become risk averse and are scared to invest in research and development and instead concentrate on mergers and acquisitions." He points to research-intensive industries which require long-term investment.

"The investor is promised by nearly all hedge funds double digit returns. I don’t think, if you look at it generally, that you can reasonably expect a 10% return is possible with companies carrying out research in big labs and so on. These people [hedge funds] are very remote. They have no interest in the business. They only have an interest in the return."

Monks’ position bears a marked resemblance to that of the German vice-chancellor Franz Müntefering, a social democrat, who last year compared private equity firms to a swarm of locusts. This month, in the run-up to the Swedish general elections, the issue was taken up by Social Democrat incumbent Göran Persson (he lost to the centre-right Alliance for Sweden on Sunday), who poured yet more scorn on the industry.

"There are pluses to hedge funds," says Internal Market Commissioner Charlie McCreevy. "They certainly keep management and boards of directors on their toes. Some boards of directors in many companies in many member states of Europe more or less feel that the shareholders are a kind of a nuisance. That’s not the way it should be at all.

"I think that some people have a notion that if you get the Commission to start interfering with hedge funds we’d eventually, through the process, come up with so much regulation…that we’d kill innovation altogether. You can regulate anything out of existence and there are some people [who] would like us to start, knowing that the end product would more than likely stifle the whole business. I am not prepared to go down that road. The case is not yet proven."

Monks laments the tendency of growing numbers of pension funds to invest in hedge funds, a trend he cites as evidence of the growing rapaciousness of capitalist culture. "McCreevy decided that no regulation was necessary, that hedge funds were waking up dozy boardrooms," he says. "They certainly are, but they are also sucking the blood out of many companies that can’t deliver these kinds of returns and therefore can’t survive."

Depending on whom you believe, hedge funds are either democratic instruments reining in power-crazed company boards or blood-sucking locusts. These two different takes on the increasingly divisive issue are not necessarily mutually exclusive. Could it be that there is a little bit of truth in both?