Brussels, 02/04/2007 (Agence Europe) - Last week the Socialist group at the European Parliament published a report into hedge funds and capital investment funds, along with detailed case studies. The report outlines the main risks for the sustainability of the European economy arising from the mushrooming of hedge funds - pressure on the pension funds of individuals, the viability of private companies at risk of being damaged by shareholder activism, worker involvement and jobs, ethical issues and the stability of the financial markets. It suggests a new strategy for regulating the financial markets at EU and national level based on a need to increase transparency in speculation.
Risks. According to the report, there are some 6900 hedge funds in the world managing assets estimated at around USD 1700 billion, with capital investment funds in Europe having assets of around EUR 640 billion in 2006. Despite this financial muscle, the funds are not regulated to the extent that they do not have to publish details of their business and activities. They are free to invest as they see fit, wielding immense capacity to put pressure on companies quoted on the stock exchange, which they buy stakes and form a network of mega-rich individual investors. The European Socialists feel that this situation is likely to involve risk. Pension funds have invested massively on the hedge fund market over the past decade and have no real way of having any definite idea of the assets they have invested in and the risks inherent in such investments. Hedge fund and capital investment funds base their investment strategies on the short-term (three to four years or less when it comes to risk capital funds) but investment in the 'real economy' of Europe requires a long-term strategy. When it comes to the impact on companies bought up or coming under the control of such investment funds, the report recognises the existence of constructive experiences when the future development of the companies is taken into account, but warns that there is often asset-stripping to the detriment of not only the struggling company's level of debt but also to the detriment of employees and future investment capacity. The report adds that the greater the level of debt of the acquired company, the greater the temptation to cut the pay of its workers.
Mentioning the different reports on these financial market actors, which underline the lack of transparency and news, mainly because most of the funds are in “offshore” financial centres with very flexible regulation and highly advantageous taxes. The report questions the remuneration in hedge funds, 2% charges on shares invested and 20% bonuses on investment generated profits, which would be more of a characteristic of the sector than economic data based on market realities.
Regulation. European socialists are calling for a, “new regulatory strategy for financial markets in member states and Europe wide” given that, “the market can't achieve this by automatic adaptations alone”. They are proposing the adoption of legislative instruments in liaison with other policies such as, “taxation, corporate governance, social responsibility, supervisions”. They believe in, “totally harmonising the legal framework of hedge funds in view of creating a single onshore fund category with a common minimum investment threshold”. They add that, “regulation on transparency and publication of information linked to alternative investments should be improved to help develop the responsibility of actors and guarantee a high degree of consumer protection”. To this end the EU is expected to elaborated minimum standards in financial reporting”.
The PES group report brings a contribution to the political debate. There is, however, little chance of triggering a specific legislative initiative from the Commission, which is known for its opposition to this possibility. The president of the Party of European Socialists, Poul Nyrup Rasmussen, declared, “Charlie McCreevy would be the last person on earth to say that there's a problem”. He was alluding to the repeated declarations from the Commissioner for the internal market, according to which speculative funds and capital investment are sufficiently controlled through standards guiding professional investors when called on for their services (EUROPE 9373 and 9371). Declarations against the concerns expressed by several financial market actors, such as the European Central Bank, the Financial Services Authority (FSA), the US, ESA European System of Integrated Economic Accounts as well as governments, such as that of Germany. (mb)