The European Directive seeking to regulate hedge funds promises to be a messy start, according to Jrme de Lavenre Lussan, Director at law firm Laven Partners.
The new EU directive seeking to regulate hedge funds is charging ahead to become law with little consultation of interested parties, Lussan says. Currently, actual consultation is only taking place with the financial ministries of EU member states. FSA officials have said that there is enormous pressure to enact the directive, and they expect a new law by December 2009.
A number of industry bodies have protested against the changes. The UK’s National Association of Pension Funds, plus its Dutch, Irish and Belgian peers are against the move. The UK Financial Services Secretary Lord Myners has also lambasted the Directives approach.
The Directive aims to stop EU based investment into alternative investment funds run by non EU-managers.
The way the directive is drafted today has some good elements, Lussan says. Requirements for enhanced disclosure and the regulation of management companies are to be welcomed. The increasingly heavy hand of governments on the control of financial markets is not. Historically, government intervention in financial markets does not have a good track record.
The new law must benefit investors and not be used as a political tool for power or a means to push the alternative investment industry out of the EU. As currently drafted, the directive is so broad it will inevitably be full of unintended consequences. For example, it applies to all alternative strategies including real estate. Many countries in the EU have thriving real estate sectors which could be put at risk. The costs of implementing the directive will probably be prohibitive for many alternative investment firms currently based in the EU.
If the directive is meant as a corrective action to any breaches of regulations which occurred last year, we should start by enforcing the existing framework rather than creating new regulations.
Hedge funds were not recognised as the cause of the financial crisis by Lord Turner or de La Rosire so why all the noise? This fact weakens the very foundation on which this directive is based.