Friday, July 10, 2009

Hedge Funds and the Farmyard Cat

Oliver Kamm is not impressed with the EU regulatory directions.
Giving new life to cliché, the EU proposals seek to close the stable door after the horse has bolted, but succeed merely in kicking the farmyard cat in frustration.
Hedge funds are different from traditional investment vehicles because of the techniques they use. They can use leverage (that is, they borrow to invest). They sell stock short (they sell stocks that they do not own, in the hope of buying them back later at a lower price). And they can lock up clients’ money for a specified period. They serve a useful purpose for the economy by enabling investors to diversify their wealth and directing scarce capital to businesses that can use it productively.
The EU proposals would place limits on leverage and require hedge funds to use European banks as custodians. There is scant economic justification for these measures. Hedge funds might indeed pose a risk to stability by borrowing too much from the banks. The remedy is to impose limits on banks’ lending, not to penalise the banks’ customers. And a requirement to use European banks is a purely nationalist


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