Sharon Bowles has a tough new job. Her first task as chairwoman of the European Parliament’s economic and monetary affairs committee is to revamp the European Union’s regulatory framework for hedge funds and private equity funds. Countries including France, Denmark and Germany have been pushing the regulator to come down hard on the sector, and as a result, the industry is up in arms.
Fund managers, investors and even members of the U.S. and U.K. governments complain that the Alternative Investment Fund Managers directive jeopardizes the competitiveness of European hedge funds and private equity funds. Domestic registration, minimum capital requirements and leverage limits on funds of more than €100 million will increase costs to investors and cripple opportunities, they argue, adding that strict tax treatment and requirements on domestic service providers are protectionist, excluding U.S. managers from Europe and risking tit-for-tat restrictions on European funds selling in North America.
The industry’s response has been rapid and coordinated. Both U.K. Treasury Minister Lord Myners and London Mayor Boris Johnson traveled to Brussels to lobby for changes. They were followed last month by three U.S. Congressmen, led by Paul Kanjorski, head of the House Financial Services Subcommittee on Capital Markets, conveying the news that the proposed legislation “scared the living bejesus out of the hedge fund and private equity community.”
Bowles spoke to Institutional Investor Contributing Writer Hugo Cox recently about the directive’s potential unintended consequences.
1. Institutional Investor: How does your committee view evidence that hedge funds contributed to systemic risk during the recent financial crisis?
Bowles: Some members of the committee are very aware of it; others are not. I regret to say that some are shouting the populist line without looking at the evidence.
2. What are the consequences?
One is the requirement of having all assets in a European depository, or one with equivalent legislation governing deposits. In well-regulated countries like the U.S., we’ll be able to establish this equivalence, but countries in Asia or Africa won’t have such legislation. We don’t want to say that pension funds can have no part in the returns offered by China or no access to the social investing opportunities in Africa.
3 How is the committee countering the notion that the directive is protectionist?
There will certainly be changes before legislation is passed. It always attracts huge publicity and is then corrected by Parliament and in council — that’s our job. For example, if U.S. hedge funds get better regulated, there’s a chance that passporting [the right to market U.S. funds in the EU] might be removed.
4 Why just one investment directive for the entire alternatives industry?
Many politicians have wanted to get their hands on hedge funds for a long time, and the financial crisis seemed like an ideal opportunity to do it. But now actors who find themselves affected need to get organized. They’re hoping they’ll get an opt-out, but this is not the direction we need to go.
5 Why not control bank lending as a more effective way to limit hedge fund leverage?
The idea is to do both. Controls on bank lending are being dealt with in the Capital Requirements Directive, though there is a chance that these proposals will be shelved — so we have to watch how that develops. I’m not sure the way to control leverage is by enforcing a maximum limit. We need to control it according to risk. Industry keeps saying, Can you go quickly so we can have certainty? But, likely, it will be after March next year before we get around to voting.
