Europe's Hedge Funds

Deliberations among the nations of the European Union about a new level of regulations for hedge funds there have reached an impasse.

I wrote here 11 months ago that the draft directive circulating at that time was dead as written. There have been lots of developments since.

The U.K., where most of the Europe-headquartered funds actually are, has been working to water down the more draconian aspects of these proposals from within the EU system, and the U.S. has been exerting some pressure from without.

The Brits are worried that this will hurt London's status as one of the world's great financial hubs, while the U.S., and in particular Treasury Secretary Geithner, worries that the EU is going protectionist -- that it will put barriers in the path of any institutions and high net worth investors there who want to entrust their money to operations in New York.

Meanwhile, the French and the Germans are pulling in the other direction, to make the regulations tougher on the nasty hedge funds, whether of New York or London, than the drafts of the directive would have it.

There is an idea circulating in some quarters that hedge funds were at fault in the 2007-08 credit crunch. That is utter nonsense. Quite old-fashioned, supposedly conservative and stodgy, institutions like banks were the real trouble makers. The hedgers generally did a good job of keeping their head while bankers all around them were losing theirs.

At any rate: the news this week is that EU diplomats tried to push the process forward at a meeting Monday, the 27th, but they failed.

A big possible winner is Switzerland. A map will tell you that the Swiss are in Europe, but they don't act like it. They've stayed away from the EU, and if EU rules do become too onerous for HFs, we might see a lot of them developing a taste for Alpine air.