G8 finance ministers meeting in Germany today were struggling towards a possible deal to monitor and control hedge fund activity more closely – but there is no consensus among investors on whether the measures are actually necessary.
It seemed unlikely a deal would be completed in the absence of Hank Paulson, the US treasury secretary, who missed the meeting due to a heavy workload. No communique had been issued as this article went to press.
Peer Steinbruck, the host nation’s finance minister, has been leading the calls for greater regulation of hedge funds, supported by European Central Bank Governor Jean-Claude Trichet.
Hans-Joerg Rudloff, chairman of Barclays Capital, understands their concerns, and told Emerging Markets that high global liquidity was pushing investors to demand ever-increasing rates of return from hedge funds. As a result, the funds were “piling on leverage”, especially in the recent spate of corporate buyouts.
“We are pushing the barriers upwards. These [funds] are master financiers who buy risk and then shift it to someone else. But in the end, you have to run companies to achieve returns. You cannot argue all the time with the value of a purely theoretical figure. These are things that everyone knows but we all choose to forget.”
However, he was sceptical on whether regulators have the capacity to tackle the rapid evolution of the market, pointing to the current struggle among central banks to respond to the inflationary pressures generated by asset price bubbles.
By contrast, other investors were doubtful that the profile accorded to the alleged threat of hedge funds by G8 finance ministers was accurately reflecting economic and financial reality.
“The market is only going to see a sharp correction if assets are fundamentally overvalued, or if someone pulls the punch bowl away,” Jonathan Anderson, chief Asia-Pacific economist at UBS in Hong Kong, told Emerging Markets recently.
Looking at the Asia-Pacific region, he did not anticipate either of these risks in the medium term, and reckoned that strong corporate earnings and economic growth justify current valuations. Moreover, major central banks were unlikely to deviate from the prevailing neutral or mildly tightening monetary policy stance.
From a European perspective, Michael Kart, managing partner at Russia-focused absolute return fund Marcuard Spectrum, also saw more of a political than a financial overtone to the G8 agenda.
“The Germans have always had a very restrictive stance towards hedge funds. Until 2004, there was a 95% corporate capital gains tax on profits from hedge funds,” Kart said. “When Hans Eichel was finance minister, he proposed a ban on short-selling.”
However, Kart echoed Rudloff’s belief that Germany’s proposals would be unlikely to have far-reaching consequences in any case.
“Germany is a relatively small investor in the hedge fund industry, so I doubt whether it really has the power to influence other countries,” Kart concluded.