Hedge funds and Private Equity - PES

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But if we in Europe – and hopefully globally – can regulate the financial markets to make them
subordinate to the real economy, without negative implications, there are enormous realeconomic
opportunities ahead of us, for the future of the whole of Europe’s of population.
That is why we need a new strategy for the financial markets in member states and the European
Union.
Part III is going to focus on possible legal instruments for responding to the impact of private
equity fund and hedge fund ownership. The various consequences of their investment strategies
range from declining tax revenues and offshore placement, lack of transparency and loss of information,
reducing the capacity of target companies to invest, encouraging job cuts and worsening
working conditions, an aggravated long-term investment situation and risks for financial stability.
Taking into account these negative consequences it is crucial to recognise that something has
to be done in order to protect the European market economy and European society in general.
But not only “to protect” – first and foremost in order to create the conditions for realising the
enormous potential for smart, green growth and new, better jobs ahead of us.
In this part, legal instruments, incentives and proposals for regulation will be presented in
connection with specific policy areas like taxation, corporate governance, social responsibility,
supervision, etc. In addition, we want to underline that ideally each proposal should be examined
for its national and EU-level implications. There is no single combination of regulations that
can answer all the new challenges. Instead they need a coherent mix of over national, European
and possibly global levels, as these funds are operating worldwide. Therefore where no competence
is granted to the EU, we would encourage national action, based on common ground, to
promote a common approach and avoid harmful competition. A successful concept designed
at national level should serve as an example to other countries, whatever the policy area touched
upon. The example of the US system should be kept in mind as regulation on such issues is
centralised and quite efficiently implemented.
To play down any need for public inquiry the HF and PE industries claim: “we are efficiencyenhancing”.
This contention is repeated ad nauseam. It is supposed to be self-evident and is
thus brandished like a talisman against any attempt to discuss the opportunity of shedding some
light on HF and PE for the sake of the lay investor.
But the efficient market hypothesis (EMH) is beyond the reach of any empirical evidence. So, if
HFs and PEs enjoy the unique privilege of always being efficiency-enhancing, it follows that they
should not be investigated, or transparent, or regulated.
In their investment strategies, hedge funds either make directional bets on futures markets or on
the future values of macroeconomic variables, or exploit price inefficiencies, or exploit specific
situations (event-driven, merger arbitrage, distressed securities). To support the contention that
hedge funds are always efficiency-enhancing one must demonstrate that they always have incentives
to act as contrarians. Therefore pro-HF and PE supporters go on repeating the following
assertions:
In their directional bets on future market trends, they take advantage of mean-revertingprocesses
and subsequently enforce adjustment to price equilibrium.
In bridging the gaps between segments of markets that would be too shallow or even nonexistent
without them, they contribute to completeness in the whole set of markets.
In bringing liquidity in corporate deals that are always beneficial for the economy as a whole,
they not only contribute to market efficiency, but also to economic efficiency.