The Exchange has responded to the European Commission consultation on hedge funds. Whilst recognising that there is a need to examine vulnerabilities in the global financial system, there is also the need to avoid the temptation to over-regulate specific areas of the financial markets where there is little material evidence of market failure but where inappropriate and hurried regulatory intervention may damage the long term efficacy of public capital markets.
We do not consider that this consultation provides sufficient empirical analysis to justify change, and we would urge the commission to conduct a more thorough market analysis on which to base its policy recommendations.
Finally, we note that the colloquial use of the term ‘hedge fund’ has created a perception that such funds are synonymous with high risk and high volatility, when the very purpose of such funds is actually to minimise both. This is an important point to note when considering that institutional investors who use hedging techniques to control risk and manage volatility, such as pension funds, are ultimately representing the interests of their underlying, retail investors. An unintended consequence of enacting inappropriate regulation in the area of hedge funds may be to hurt the prospects of the very type of investor the Commission would ultimately prefer to protect.
London Stock Exchange response to hedge funds consultation (file pdf - 68 KB)