sine qua no of hedge funds. After all if they are trying out all sorts of
financial gymnastics, the last thing they want is a bureaucrat telling them
whether they should be doing back-flips or somersaults. Such is the
international nature of the hedge fund business that they are not
particularly wedded to any particular country. If they want to short
Turkish government bonds whilst taking a long position in peso volatility,
they can do it from the comfort of their beach villa in Grand Cayman just as
easily as they can from their mansion in Connecticut or their Mayfair mews.
So imagine their consternation when the EU issued a draft directive on
alternative investment funds that would limit their capacity to borrow.
Private equity firms are also caught by the rules. What upset most of the
hedge funds is that the rules try to capture the implicit borrowings in
derivatives as well as traditional borrowings.
"If this directive goes through as drafted, large chunks of the industry
will be leaving Europe, whereas we have the opportunity today to have large
chunks of this industry coming to Europe," said Ian Wace of Marshall Wce.
The FSA and the Treasury described the borrowing provisions as naive and say
they will fight the directive. If they are as effective as they were in
regulating the banks, expect the shares of intercontinental removal firms to
go through the roof. We repeat our buy recommendation of a few months ago
on Zug real estate.