Executive summary - Udo Bullmann

finance infrastructure through long-term investment programmes. This is a clear example of howthe short-term strategies of private equity funds and the long-term development of infrastructureoperators are in direct conflict. Furthermore, it is to be expected that private equity funds leaveinfrastructure operators in a condition where their capabilities for pursuing their long-termobjectives have been severely weakened.Employees’ pension fund investments are also major concerns. Investors in this sense aredefined as being ‘ordinary’ retail investors such as collective investment scheme investors,pension scheme beneficiaries (and their agents such as trustees), and insurance fundpolicyholders. While the expert report from the European Commission argued that investorswould gain added value by investing in hedge funds, alternative investment funds in the form ofstructured products have the potential to offer ordinary retail investors a product with a return thatwould be between bonds and equities on the risk spectrum. However, all in all it is not clear thathedge funds offer such added value potential for investors and therefore it is not clear why retailinvestors should have access to these funds. While it is difficult to identify the benefits of retailinvestors entering the market of hedge funds, it is easy to point to the problems. Lack oftransparency and disclosure - even when it comes to basic operations of alternative investmentfunds, is just to mention one aspect.Finally, the stability of financial markets is not the least of our concerns. Six factors havebeen presented as potentially impediments to the financial stability of the overall market. Theindustry’s growth and the extensive use of performance fees are likely to go hand in hand withincreased competition and risk taking. Sometimes the incentive is just too big, pushing hedgefund managers to take unnecessary risks. The amount of assets under management has becomemore significant, and a hedge fund failure with the same amount of assets under management as atraditional fund may have a far greater market impact. In the light of the current size of assetsunder management, there can be little doubt that some hedge funds – using strategies such asshort selling – can influence prices independent of fundamentals and cause financial instability.A key concern regarding hedge fund and financial market stability is related to increasingsimilarities 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. Wehave argued that a boom in leverage and risk may go unnoticed, because the boom is originatingfrom markets characterised by great opacity, e.g. the market for credit derivatives. Finallyregulators are finding themselves in a vacuum where they are unable to react, as they are placedin a situation with an enormous lack of transparency and reliable data. This means that it isextremely difficult to make informed decisions about financial threats. So we believe that hedgefunds create substantial threats to the global financial stability.Coherence and co-responsibility are threatened by the extreme management fees andremuneration 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, biteby bite, by financial market operative models? Our European economies need resources, brainsand the means to function and develop in our globalised environment. How will we build on thefuture if the creation of wealth goes to very few, to the detriment of the many? We have toreconcile long-term needs of businesses and societies in general with the short-termism of moreand more investors, prominently among them alternative funds. While promoting investments hasalways been a credo of the Lisbon agenda, not all investments are productive and those that are