Hedge funds and Private Equity - PES

84
3. The European response – current EU regulation
It’s safe to say that there is a general legal – but not a coherent and comprehensive – basis
for the regulation of alternative investment at European level. It’s true that at present no tailormade
legislation exists for it. Although there is European legislation on institutional investors (see
85/611/EEC, the so-called UCITS directive), this does not as a rule apply to investors from the
alternative sector – i.e. neither Hedge Funds nor Private Equity funds as such.
UCITS (Undertakings for Collective Investment in Transferable Securities) are specially
constituted collective investment portfolios exclusively dedicated to the investment of
assets raised from investors. Under the UCITS Directive, UCITS investment policy and
its manager are authorised in accordance with specific requirements. UCITS’ legislation
aims to establish a defined level of investor protection. This is achieved through strict
investment limits, capital and disclosure requirements, as well as asset safe-keeping and
fund oversight provided by an independent depositary. UCITS benefit from a ‘passport’
allowing them, subject to notification, to be offered to retail investors in any EU jurisdiction
once authorised in one Member State.
From the positive experience of the UCITS Directive, the UCITS funds developed very well after
the adoption of the Directive in 1985 as it proved to be a very efficient way to develop a real
Single Market for such a financial product while not harming investors’ protection. Thanks to this
Directive, UCITS benefit from a ‘European label/brand’, which is now a tool to export pan-European
expertise at worldwide level (e.g. two thirds of funds currently registered in Hong-Kong are
European UCITS).
However, there are several limits to the current framework of alternative investments in the EU.
Currently onshore hedge funds/funds of hedge funds/private equity funds are fragmented
through divergent national regulations. So, there is still a long way to go, in developing a Single
Market for such onshore alternative investment vehicles.
No actual EU regulatory framework is provided for onshore alternative investments. A good next
question is: what about offshore or non-EU regulated products?
The European Commission (Commissioner McCreevy) wishes clearly to develop the so-called
‘Private Placement’: i.e. the ability for a firm registered in the EU to sell any type of product
(including offshore funds or non-EU regulated product) in the EU, to so-called ‘qualified
investors’ (i.e. professional investors: insurance companies, pension funds, etc).
Our concern is that the final risk will be borne anyway by the end investor (e. g. retirees, retail
investors) as unit-linked life insurance and ‘defined contribution’ retirement saving products
develop. Therefore we think that it is necessary to provide a minimum safety net for alternative
products to be sold in the EU.
In addition to giving increased investor protection, a EU regulatory frame for alternative investments
(direct hedge funds/funds of hedge funds; private equity funds) could provide a success
similar to the UCITS case. Within the EU, a regulated framework would help develop a Single
Market for alternative investments, with the right level of investor protection and possible overseeing
by regulators. Out of the EU, a ‘non-UCITS fund’ Directive would help develop a