EUROPE: Proceedings from Private Equity and Hedge Funds Conference

Thursday March 12 2009

The European Commission organised a high-level conference on private equity and hedge funds, on 26th and 27th February 2009.

The conference brought together representatives of the hedge fund and private equity industries, investors, members of the regulatory community and other experts to discuss emerging policy issues in these sectors.

The hedge fund industry now looks set to embrace increased regulations and enhanced levels of disclosure and transparency. Commissioner Charlie McCreevy and Mr. Poul Nyrup Rasmussen, MEP and President of the Party of European Socialists have called for EU legislative action while taking the view that the time for self regulation was now over.

Mr. Rasmussen who said that the EU should take the lead in global regulation also said that existing codes of conduct did not address important issues like taxation, excessive debt burdens on portfolio companies, or excessive manager fees. There are no credible sanctions to punish managers that do not comply with their commitments.

Antonio Borges, Chairman of the Hedge Fund Standards Board reached out to support hedge funds stressing that, in the current financial crisis, hedge funds have proven to be responsible and resilient when compared with other sectors in spite of investor panic and regulatory interventions like the curbs on short selling.

Mr. Borges attributed this resilience to a superior understanding of risk among hedge fund managers- the fact that hedge fund managers typically invest alongside their clients; and to powerful market discipline.

With regards to risk management and transparency, panellists at the opening hearing agreed on the global need for hedge funds managers to implement independent processes, where key processes are independent of the manager.

Panellists said that the business model for a hedge fund should provide for a manager, an administrator, a prime broker and where appropriate, a custodian, all independent of each other.

Applying some of the UCITS governance rules to hedge funds since UCITS III was sufficiently flexible to accommodate most hedge fund investment strategies, UCITS requirements on valuation and asset custody were a solid basis for managing risk across all investment strategies-it was suggested.

Another key issue that featured was Short selling. Participants stressed on the distinction between short selling and naked short selling which is banned by almost every exchange. Hedge funds stressed on the benefits of short selling and the damage done to the sector by the full bans imposed last year.