Hedge funds and Private Equity - PES

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Furthermore investment banks are not under bank supervision at all. They are under SEC rules
and only for their brokerage activities. All other business goes totally unsupervised. It ensues
that the feasibility of indirect regulation via banks is dubious, at least debatable. In any case it
cannot be taken for granted. And even if it were, banks have no incentives to be the regulators’
scrutineers of hedge funds for two reasons:
On the one hand, banks are busy acquiring or setting up hedge funds themselves. They are
doing so to boost profits by all means, prodded as they are by shareholder value incentives.
On the other hand, prime brokerage for hedge funds is sold with a whole bundle of services
(clearing, settlement of transactions, custody of assets, research, legal advices and the like).
This is a very profitable, risk-free fee business. Likewise, securities lending earns interest on
the process of short selling by hedge funds. The more business volume they get the better.
There is a blatant conflict between banks’ incentives and regulators’ goals.
3.2 The main beneficiaries of regulation
In the last few years after the collapse of the “new economy” bubble, the structure of HF
industry has changed in its source of capital and in types of strategies.
It has often been alleged that there is no need to regulate hedge funds because their clients are
wealthy individuals who risk their own money and can take care of themselves. This assertion
was roughly correct until the collapse of the equity bubble. But a dramatic change occurred in
the early years of the present decade. As shown in Parts I and II, public saving invested via
pension funds and funds of funds reached almost the same percentage in 2005. When corporations,
insurance company endowments and foundations are included, it makes up 56 per cent of
hedge funds. Collective saving into hedge funds is on a much faster track than any other source
of capital. Therefore hedge funds put at risk as much of the public’s money as mutual funds.
The increasing exposure of private pension schemes to hedge investing must also be considered,
and that the introduction of UCITS III principles in the different domestic regulations ruling
mutual funds, will speed up growth of such products. So there is a clear and increasing need
to regulate such a market.
The lack of investor protection and of disclosure requirement becomes intolerable.
Not only pension fund investors but also the entire real economy as such will benefit from appropriate
regulation as reflected upon in Part II. i.e.:
Financial stability
The Lisbon goals and green growth
The companies’ viability in the globalised economy
The wage earners’ education and qualifications to match the new jobs
The coherence in our societies and job creation
The financing of our welfare states
As shown in Part II, hedge funds invest massively in risky strategies. Indeed the anti-regulation
rhetoric for hedge funds has always been eager to point out that hedge funds specialise in arbitrage
between market segments. Therefore they take no bet on the direction of markets. Having