Monday, 5 July 2010

Hedge Funds & the EU

The EU bureaucrats have got the hedge funds top of the list for a big dose of EU style regulation. The hedgies are clearly concerned. Their dilemma is summed up by a recent quote by one Wouter ten Brinke, head of Amsterdam-based fund of funds Theta Capital, "You're not going to make money if you're forced to sell every time something goes down. People will have to realise this when they invest in their Ucits III structures." Ucits are segregated accounts offering investors transparency and day to day control over their largely liquid funds. This is not likely to be profitable in the long run as Mr ten Brinke says, ""If you have staying power, if you're not forced to liquidate, that's where you can benefit most from less liquid strategies or instruments."

Studies have shown hedge funds with lock up provisions produce excess returns of 4% to 7% per year over their relevant liquid benchmarks, ten Brinke said and although he runs a fund that invests in illiquid instruments and is talking his book there is considerable truth in what he says. Nevertheless to attract the punters funds are going to have to promise to hold much more in liquid assets than the did previously. A recent survey of such funds showed most expect 2010 to be a 'trying' year ie much smaller profits and bonuses. These funds now they have a problem of rebuilding trust with their investors, maybe not on a BP scale, but sufficient to badly dent the bonus gusher.

The Channel Islands, another hot bed of hedge funds and not in the EU, have decided to open offices in Brussels and New York to lobby and influence proposed draconian fund regulation which would cripple their economies. Previously the Islands relied on Britain to do the diplomacy on their behalf but its clear they no longer believe the UK FO to stand up for their financial interests in the EU or US. The Islands also have a significant agriculture and fishing sector in their economies which the FO has never shown any interest in representing.

I remain convinced however the hedgies will migrate to Switzerland. The Swiss understand and love money and people with money. The have the best democracy in the world, the fewest professional politicians and binding referendums if the people don't like what the government proposes. The international schools are excellent as is the ski-ing. Add in low crime and low personal tax and it's a no brainer in my view.

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