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Regulation of Hedge Funds in the EU

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Bachelor Thesis


Business Administration>General




Bachelorarbeit Case: EU supervision of HF In the previous section, a method for identifying paradigm shifts has been developed, and two competing paradigms in EU financial supervision have been identified. Before continuing the analysis of the Bachelor Thesis: Regulation of European Hedge Funds, this section will introduce case studies. Key concepts will be defined and a brief historical overview and literature review will be provided. Key concepts This article deals with EU regulation. This refers to legislation decided by the council and parliament, rather than the legislation of a single member state decided by governments. The key concept in this article is the concept of hedge funds. The European Union did not define HF until 2008. When it passed the definition, it chose a principle-based definition because the investment strategies used by funds understood as HF are varied. EC defines HF as a collective investment tool, which can usually be distinguished from other types of investment funds by the following characteristics: Through the use of hedging and flexible investment strategies, it focuses on providing absolute returns even when the market is down. These investment strategies usually translate into relatively high and systematic use of leverage-through borrowing, short selling, and derivative positions. Traditionally, the hedge fund investor base has been limited to institutional or other sophisticated investors, which has led regulators to waive many of HF's investment protection and disclosure requirements. However, the extent to which HF is not subject to regulatory requirements varies from country to country. (CP, 2008, p.3) This will be the definition used in this article. In policy debates and regulatory texts, there are two differences; between retail investors and professional/institutional investors; and between collective investment commitments in transferable securities (UICTS) and alternative investment funds (AIF). Definitions of these concepts can be found in Appendix 2. By clarifying these concepts, you can continue to understand the brief history of HF. A brief historical overview The first hedge fund was founded by Alfred Winslow Jones in 1949. However, the term "hedge fund" did not appear until 1966, when an article in Fortune magazine praised Jones' investment strategy. The industry has grown significantly in recent years, and estimates by Hedge Fund Research indicate that HF's assets under management increased from US$39 billion in 1990 to US$487 billion in 2000 (Agarwal and Naik, 2000). The situation before the crisis Until 2011, only UCITS were regulated at the EU level. The national regulations of the member states are pieced together to regulate the operation of AIF within their respective jurisdictions (Directive 2011/16/EU). The EU Investment Fund Framework expressed concern in July 2005 that the intricacies of national regulations may inhibit the operation of the industry and the internal market (SEC (2005) 947). The EC stated that the investment fund industry is of strategic importance because it helps to provide adequate reserves for retirement, allocate savings to productive investments, and helps develop sound corporate governance (SEC (2005) 947, No. 2 -3 pages). The main purpose of the Green Paper is to evaluate the performance of the UCITS Directive. However, the EC realized that the competition between AIF and UCITS funds has become increasingly fierce, which has changed the risk structure of the industry (SEC (2005) 947, p. 3). In order to clarify this issue, it was decided to arrange a public hearing in October 2005. The Green Paper is full of strong belief in the efficient market hypothesis. At a public hearing on investment funds held in October 2005, ideas and tools from two paradigms were represented. The European Fund and Asset Management Association (EFAMA) stated that a consistent cross-sectoral approach to asset management is needed, but supervision should be as loose as possible (OH, 2005, p. 3). On the contrary, a consumer group said that financial innovation makes financial products more difficult to evaluate and requires more information disclosure and transparency. They strongly oppose the idea that self-regulation is the best method (OH, 2005, p.5). Especially with regard to HF, the market-making alliance is very strong and urges regulators to avoid setting new barriers for flexibility and innovation (Oh, 2005, p. 6). However, the Spanish financial regulator called on the European Union to conduct investigations and dialogues on the risks associated with HF. The hearing was concluded by Mr. Gerd Häusler, Advisor and Director of the Fund’s Capital Markets Department. He emphasized that the asset management industry is vital to the European economy, especially because of pension reforms. He concluded that no call for intervention is appropriate and stated that investors should not be placed in a nursing home environment (OH, 2005, pp. 8-9). This statement clearly reflects a firm belief in effective markets and market discipline. Read Less