Hedge funds and Private Equity - PES

finance infrastructure through long-term investment programmes. This is a clear example of how
the short-term strategies of private equity funds and the long-term development of infrastructure
operators are in direct conflict. Furthermore, it is to be expected that private equity funds leave
infrastructure operators in a condition where their capabilities for pursuing their long-term objectives
have been severely weakened.
Employees’ pension fund investments are also major concerns. Investors in this sense are
defined as being ‘ordinary’ retail investors such as collective investment scheme investors,
pension scheme beneficiaries (and their agents such as trustees), and insurance fund policyholders.
While the expert report from the European Commission argued that investors would
gain added value by investing in hedge funds, alternative investment funds in the form of structured
products have the potential to offer ordinary retail investors a product with a return that
would be between bonds and equities on the risk spectrum. However, all in all it is not clear that
hedge funds offer such added value potential for investors and therefore it is not clear why retail
investors should have access to these funds. While it is difficult to identify the benefits of retail
investors entering the market of hedge funds, it is easy to point to the problems. Lack of transparency
and disclosure – even when it comes to basic operations of alternative investment funds,
is just to mention one aspect.
Finally, the stability of financial markets is not the least of our concerns. Six factors have been
presented as potentially impediments to the financial stability of the overall market. The industry’s
growth and the extensive use of performance fees are likely to go hand in hand with increased
competition and risk taking. Sometimes the incentive is just too big, pushing hedge fund
managers to take unnecessary risks. The amount of assets under management has become
more significant, and a hedge fund failure with the same amount of assets under management
as a traditional fund may have a far greater market impact. In the light of the current size of assets
under management, there can be little doubt that some hedge funds – using strategies such as
short selling – can influence prices independent of fundamentals and cause financial instability.
A key concern regarding hedge fund and financial market stability is related to increasing similarities
or correlation among hedge fund strategies. In addition to increasing correlations,
observers have stressed that the liquidity of many hedge fund investments may be decreasing.
We have argued that a boom in leverage and risk may go unnoticed, because the boom is originating
from markets characterised by great opacity, e.g. the market for credit derivatives. Finally
regulators are finding themselves in a vacuum where they are unable to react, as they are placed
in a situation with an enormous lack of transparency and reliable data. This means that it is
extremely difficult to make informed decisions about financial threats. So we believe that hedge
funds create substantial threats to the global financial stability.
Coherence and co-responsibility are threatened by the extreme management fees and remuneration
of partners within the HF and PE industry.
All the issues raised in this part of the report challenge the achievement of the Lisbon goals.
More precisely, what are the perspectives in terms of innovation, Research and Development,
new technologies, development of infrastructures and networks if the real economy is eaten, bite
by bite, by financial market operative models? Our European economies need resources, brains
and the means to function and develop in our globalised environment. How will we build on the
future if the creation of wealth goes to very few, to the detriment of the many? We have to reconcile
long-term needs of businesses and societies in general with the short-termism of more and
more investors, prominently among them alternative funds. While promoting investments has
always been a credo of the Lisbon agenda, not all investments are productive and those that are
clearly destructive must be prevented.
Part II – Six concerns about our European social market economy
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