Hedge funds and Private Equity - PES

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Considering single strategy products regulators in the main European countries seem oriented
to substantially limit the distribution of such funds on the retail segment. As far as fiscal treatment
is concerned, on one side, the common aim of fiscal Laws has been to inspire the taxation
of domestic onshore vehicles to a principle of fiscal transparency and, on another one, to discriminate
offshore vehicles domiciled in the main fiscal heavens. It has anyway to be signalled that the
effectiveness of such policy is in part undermined by the tax exemption granted to some kind of
institutional investors (for instance UK pension funds).
1.14 All in all: Hedge funds Industry for good or bad?
From the very start our ambition in this report has been to stick to the facts using accessible
data and then our own analyses to guide us to conclusions.
Of course, one could not seriously blame hedge funds for all the ills that befall the international
financial system.
And one can argue for possible, positive effects of hedge fund activities:
They may contribute to market liquidity as they tend to be more willing to put their capital at
risk on volatile market conditions, so that market shocks can be observed.
It can also be argued that hedge funds – as active risk takers – may also contribute to
spreading of risks among market participants.
We know cases where the activity of hedge funds have been a wake-up call to sleepy
managers of co-operative industries.
It is argued that hedge funds – in their request for excess returns – arbitrage away price differences
for the same risk across the market, which is beneficial for keeping capital costs down.
One must add that these effects will be conditional on specific market circumstances.
Finally, under certain conditions one could argue that hedge funds offer more possibility for
diversifying portfolios thereby increasing the completeness of financial markets.
But the rapid growth of the hedge fund industry also raises important questions about the
possible negative implications for financial stability and other risks. As we see it, we can
summarise the risks in the following points:
The systemic risks, ie. the risk of destabilisation of financial markets. Hedge funds can cause
financial instability through their potential impact on financial markets and banks. The near
collapse of LTCM in September 1998 provides the most vivid example of how hedge funds
have the potential to disrupt the functioning of global financial markets.
Market abuse i.e. potential market price manipulation and insider trading. The high pressure
on production of extreme growth yields by managers and the use of out-performance commissions
can create pressure on hedge funds to test the limits of certain rules of the market. The
impact of such market abuse will be substantial in a market environment where speculative
funds represent between one third and one half of the arbitrating volumes.
The misbehaviour in shareholder activism. We are seeing too many examples of hedge funds
exerting excessive influence on the strategy of some listed companies with a potential negative
impact on all stakeholders. This is clearly because hedge fund activities favour a
short-term approach of the target company strategy. The short-term approach is in direct
contradiction to the long-term needs of companies to compete on investments in the global
economy.