|
Hedge funds and private equity firms were under scrutiny last year before the credit crisis intervened and the focus moved to investment banks and sovereign wealth funds.
But any hope that the spotlight had moved on permanently was short-lived. Hostilities have been renewed in Europe, where two reports working their way through the system seek to impose regulation on both hedge funds and private equity.
And in the US, a change to the taxation of hedge fund managers' compensation is back on the agenda, having been thrown out last year.
This is despite moves by both industries to introduce self-regulatory standards designed, presumably, to head off the threat of statutory regulation.
Politicians in continental Europe, in particular Germany, have long been suspicious of the activities of private equity firms and hedge funds, especially activist funds.
Those suspicions have been fuelled further by the credit crisis, with Poul Nyrup Rasmussen, president of the Party of European Socialists and Denmark's former prime minister, claiming these private pools of capital were at least partly responsible for the crisis due to their high levels of leverage.
He says they are "a threat to financial stability" and are likely to trigger further crises if they are not regulated.
Rasmussen's report on hedge funds and private equity for the European parliament's committee on economic and monetary affairs (Emac) calls for much greater transparency, down to disclosure of directors' remuneration, enhanced capital requirements, controls on the use of leverage, and the setting up of a public credit rating agency and a European supervisory body for financial services.
The European Parliament will vote on these proposals later this year.
Legislative path
There is some hope among industry trade associations that Rasmussen's report will not get the votes it needs to take it further down the legislative path.
But another report, on the transparency of institutional investors by German MEP Klaus-Heiner Lehne, is thought to be couched in vaguer language, making it "more dangerous", according to someone close to the issues, as it is likely to win the support of German MEPs and could get the necessary votes.
Aima, the Alternative Investment Managers Association, says the reports are "rehashing old misconceptions". Florence Lombard, chief executive of Aima, believes there is significant opposition from members of Emac to the Rasmussen report, underlined by the 125 pages of amendments she says landed on her desk last week.
There is no call from national regulators or investors for further regulation of hedge funds or private equity, says Lombard, so it is purely a political process.
The hedge fund standards brought in this year should be given time to bed down before there is any move to increase regulation, she suggests.
However, self regulation may not be enough. It has been tried in the past by the financial services industry and been found wanting.
On the other hand, tighter regulation could stifle innovation.. But that does not mean hedge funds should be free to skew outcomes in their favour by being able to operate in a less transparent way than other market participants.
The ABI suggests legislation could be deflected by tackling some of the underlying problems that lead to the perception that private pools of capital should be more tightly controlled.
Peter Montagnon, director of investment affairs at the ABI, identifies three areas that are particularly relevant to the issues raised by hedge fund behaviour.
First is the area of market abuse, where proper enforcement is essential, he says. Second is the need for more disclosure, particularly in relation to derivative holdings and their impact on voting rights. Finally, and most important, is the need to clean up the voting chain.
"In Europe, the chain is complicated and if you own shares across borders it is difficult to know if they are being voted. A lot of votes go missing because of the complexity of the chain," says Montagnon.
That allows a hedge fund to take a small stake in a company, go to the annual meeting, and steal the show. Making the process more transparent and properly documented would reduce the threat posed by activists.
The voting issue is one also raised by the Conference Board, the US business organisation. Its recent white paper on hedge fund activism recommended, among other things, that companies give advance notice to shareholders of the agenda for meetings.
This would give them to time to assess whether there were any key voting concerns and call back stock they had lent.
Sorting out the voting process does not sound an impossible task. But it probably requires pushing past the inertia of big institutions, particularly custodian banks, which may be reluctant to change long-established practice.
Perhaps it is time the European authorities turned their attention in this direction.
|
