Hedge Fund Managers With Most Assets Face EU Rules

Date: Monday, April 13, 2009
Author: John Rega, Bloomberg

Hedge fund managers with the largest 15 percent of portfolios in the European Union would have to report risks, debts and trading activities to regulators under a draft proposal to tighten oversight after the financial crisis.

The EU’s executive agency in Brussels is weighing plans to regulate “alternative investment fund managers” who oversee at least 250 million euros ($333 million). The measure also covers private-equity buyout firms.

Focusing on the biggest managers would bring 76 percent of EU hedge fund assets under scrutiny, following calls from the Group of 20 nations to oversee funds large enough to put financial markets at risk. The measure, which still may be changed before it is formally proposed, may face resistance from lawmakers who have demanded rules covering all funds.

“Without any threshold you’d completely kill the startups,” Tom Brown, head of investment-management consulting at KPMG Europe LLP, said in a telephone interview from London. “It’s important to keep that entrepreneurial and dynamic spirit of the industry.”

The commission’s aim is to focus regulators’ attention “where risks are concentrated,” the draft said in an explanatory memorandum. Smaller managers “are unlikely to give rise to important systemic risks or to be a threat to orderly markets.”

Managers, Not Funds

The provisions target managers, rather than the individual funds, because it’s their activities rather than the assets held that can give rise to risk, according to the commission.

Managers who meet the requirements, including minimum capital, would be eligible to offer their funds to professional investors anywhere in the region.

Poul Nyrup Rasmussen, a Danish Socialist in the EU Parliament who led the push for EU rules, criticized the draft as “full of loopholes.” He said in a statement that the law should cover funds, not just managers, and require more disclosure.

The European Commission, the 27-member executive agency, will make the proposal this month, President Jose Barroso said at last week’s G-20 meeting. Charlie McCreevy, the commissioner for financial services policy, said Feb. 26 that hedge funds, while not the cause of the crisis, merit oversight to guard against collective risks such as herd trading that can disrupt markets.

Most hedge fund managers are already regulated in European countries, unlike in the U.S., said Peter O’Dwyer, a board member and strategy adviser at Trinity Fund Administration Ltd. in Dublin.

Problem or Solution

“I question the whole preoccupation with the hedge funds,” said O’Dwyer, in a telephone interview. “They’re not part of the problem, they’re part of the solution,” providing investment to sustain the economy.

The Alternative Investment Management Association, a London trade group for hedge funds, declined to comment.

The European Parliament and EU governments can reject, amend or approve the directive. If passed, it would then be written into national laws.

“We don’t comment on drafts,” Mark Gray, a spokesman for the commission, said by telephone. “This still has to be assessed very carefully.”

To contact the reporter on this story: John Rega in Brussels at jrega@bloomberg.net.