Executive summary - Udo Bullmann

Our analysis is that these concerns are well-founded.1.9. Taxes and off shore/on shoreIn a closed economy one can argue - from a theoretical point of view - that using taxdeductions in one place and revenues in another for taxation would not imply great harmfrom societies’ point of view because the closed economy will ensure that one day fairtaxation will be the result. This is obviously not the case in an open economy in theglobalised world. It poses the question of how to ensure tax revenues for the financing of ourwelfare states in Europe - when they are faced with increasing tax evasion due to hedge fundand private equity funds being registered in an offshore location.The international financial authorities are not offering clear answers.Anyhow, for the sake of clarity we must distinguish between taxation of the fund andtaxation of the fund manager. The broad majority of funds are located outside the EU -chiefly for the reason of tax minimisation - with the consequence of tax losses for the EUregion. This loss of income cannot be avoided by ensuring that managers pay the correctamount of tax for their on-shore activities.It is a complex challenge to try to enhance efforts to protect tax revenues for Europe’swelfare societies given the international character of hedge funds and private equity funds. Itis not impossible - there can be a case for coordinated actions among member states. But acondition of a more efficient approach will be higher transparency and disclosure.1.10 The return to investors - better than others?The staggering growth of the hedge fund industry raises the obvious question: why areinvestors interested in hedge funds? The prevailing answer to this question is “financialperformance”. The “strong selling point” of both hedge funds and private equity funds is thatthey appear to offer the opportunity of superior investment returns (when compared to‘conventional’ asset classes) plus reduced volatility. The data presented in the table belowcould be seen as a confirmation of this point. In the last thirteen years hedge funds haveproduced a 4.4% excess of return compared to US government bonds, the most popular lowrisk asset class among investors. This is marginally higher than the excess return of indexedinvestment in S&P 500 stocks and almost 2% more than indexed investments in NASDAQstocks. Furthermore, this financial result has been achieved assuming a relative risk (trackingerror) limited to 8.6% per year, versus a 15.6% and 27.4% in the case of a long-onlyinvestment in the stock market. Finally, the Information Ratio tells us that on average hedgefunds’ power to ameliorate investors’ risk return profile has been double that granted by anequity investment and more than five times that of tech stocks.24