Chairman of the Hedge Funds Standards Board Antonio Borges believes the EU's directive on alternative investment fund managers has come at a bad time, as David Walker reports
The EU’s draft plans to regulate hedge funds are protectionist, and lock American managers out of Europe’s investor base at the very time trans-national coordination on financial matters is crucial, according to the chairman of the Hedge Fund Standards Board (HFSB).
In a wide-ranging interview, Antonio Borges told Global Pensions Continental Europe’s politicians wrongly blame hedge funds for helping cause the credit crunch and Greece’s debt crisis, and are now wrong to militate against them as a result.
The idea of limiting options of investors to choose where they want to invest is not good for the industry. No industry will ever thrive out of protectionist deals
He added that pensions will suffer from provisions in the draft Alternative Investment Managers Directive, which lays out how the EU will regulate alternative investment funds based in its 27 member states, often for the first time.
EU pension funds and other European allocators to hedge funds, including some HFSB members, look set to be barred from investing in non-EU hedge funds under the AIFM directive, slated to take effect in 2012.
Before then, EU countries’ finance ministers, the European Parliament and the EC council of economic and financial affairs must find common ground between their views on regulation before a commonly agreed version is put to European Parliament vote next month.
The HFSB’s 13 trustees include heavy hitters such as Tom Dunn, managing principal of New Holland Capital, which advises the Netherlands’ ABP pension fund on its hedge fund portfolios, and Peter Clarke, chief executive of Man Group, the world’s largest listed investor in hedge funds. Anthony Lim, managing director of the Government of Singapore Investment Corporation, is also present.
Borges said: “The idea of limiting options of investors to choose where they want to invest is not good for the industry. No industry will ever thrive out of protectionist deals.”
He added Europe’s approach to barring access to non-EU funds from EU investors has stung Washington at precisely the wrong moment. “At the very time we need to co-operate with America on global financial regulation, we are amassing against them. The US is the financial centre of the world, we should be welcoming them to the table to discuss and negotiate, and put in place a set of plans in the interests of the whole world.”
He said the fact US Treasury secretary Timothy Geithner wrote twice to Europe’s finance ministers during the AIFM’s drafting process was unprecedented.
“This is the complete opposite of the inclusive G20 approach,” Borges said.
He added the continent’s attempt to regulate Europe’s alternative funds – which are based mainly in London - showed how differently Continental politicians and their counterparts in Whitehall viewed the function of capital markets.
“In Europe, big shareholders control companies directly and minority shareholders are supposed to be suppliers of cheap capital. They certainly should not be exercising powers as investors.
“In Britain, by contrast, financial markets exist for investors. Markets should make it possible for them to demand an appropriate return on capital, and intervene if they are not happy. Tough customers make for good companies.”
Borges said these divergent perspectives stood in perpetual conflict, even if Europe holds begrudging respect for the dominance of the UK approach.
He added the underlying issue revolved around control over one’s investments. “Do you have control over how your money has been spent? Can you stop and say it is your money and you are not happy with the way companies are using it?”
UK under fire
Europe used the near collapse and partial nationalisation of large UK banks in the crunch to launch a “massive campaign to discredit the UK approach”, Borges said.
“It moved immediately on hedge and private equity funds, as the clearest symbols of the Anglo Saxon system, because they are the most activist funds.
“The Continent perceives hedge funds as creating problems, whereas in fact they move prices to where they should be more quickly than would otherwise be the case,” he said.
“Hedge funds actually mitigate crises – contrary to the view they cause or expand them – because they step in when prices are wrong and push prices in the right direction early.”
This might involve feeding shares into the market via short selling, a practice much villified recently.
German regulator BaFin last month banned the naked short selling of 10 financial stocks and of eurozone sovereign bonds in a bid to calm volatile fixed income markets.
Borges said naked shorting – selling securities before first owning or borrowing them, in the hope of profiting by buying them back more cheaply later – is not prevalent, and especially not among Europe’s hedge funds.
“It is an extremely risky practice,” he said, proposing instead of a ban, the imposition of harsh penalties for funds that fail to deliver securities they have contracted to sell.
He said if funds had been shorting Greek debt two or three years ago, this year’s precipitous falls in price, concomitant hikes in yield, and general volatility, might have been averted.
“Many investors might have sold their Greek debt earlier and we would not have had the extreme overhang of it. Some treated Greek and Portuguese debt as though it was equivalent to German debt, without political risk. Then the flag was raised maybe these countries are not on sustainable paths.”
Instead of recognising the looming problem, European politians ignored it, and blamed speculators, he added.
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