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Is regulation the right response to hedge funds?

Date: Thursday, October 26, 2006
Author: Clare Harrison, IR Magazine. thecrossbordergroup.com

IROs debate with activist investors at the IR Magazine Continental Europe Conference

October 26, 2006.

ZURICH -- Leading IR professionals and investors gathered in Zurich yesterday to debate the most pressing issues facing the IR community. Both groups expressed concern over the prospect of regulatory intervention, even with respect to unruly hedge funds.

Unsurprisingly, Charles Groves, partner and fund manager at North Atlantic Value, an activist hedge fund, is averse to the prospect of tight regulation. 'One of the benefits of hedge funds is their flexibility,' he said. 'Anything that increases the burden on hedge funds will add a burden on companies and markets.'

The head of IR at Nestlé, Roddy Child-Villiers agreed in part: 'Personally, I'm not a fan of regulation.' However, he added that 'if hedge funds want us to be open with them, they need to behave as they would want us to behave.'

Groves defended many of the tactics used by hedge funds. 'I see activism to be about bringing ideas to the table and increasing value for all shareholders...Activist shareholders will always support a management team creating value for their shareholders'.

Activist investors from outside the hedge fund world also argued that shareholder activism should be welcomed in many cases as an effective method of getting companies to improve their governance.

Martin Forrest, director of communications at Knight Vinke Asset Management, pointed to his firm's experience with Shell. Knight Vinke's restructuring proposal initially provoked a frosty reception. As time progressed however, Shell began to cooperate and its relationship with Knight Vinke went from 'hostile to cordial.'

Forrest was keen to distance Knight Vinke from short-term activist investors, pointing out that activists can come to the table with very divergent aims and interests.

Paul Munn of Hermes Equity Ownership Services gave the view of an indexed pension fund: 'We're in these stocks for the long run. If you can't get out, you have to roll up your sleeves and get in.' He also expressed concern about governments getting involved in the regulation of hedge funds: 'That would put long-term owners like Hermes at a severe disadvantage.'