Commission mulls future of investment in EU[fr][de] 

Hedge funds

This is a type of investment fund which typically involves the forming of a limited partnership or limited liability company. Such structures are currently not subject to strict regulation and carry out more unconventional investment strategies. They can involve high risk, but also make high profits and are mainly used by experienced investors. The Commission is looking at whether current regulation hinders hedge fund profitability and whether specific investor protection regulation is needed.
The experts' report advocated no new specific regulation but raised a number of issues:

• Divergences in national approaches. This 'regulatory patchwork' causes delays, expense and hinders Europe-wide distribution. There is a need for mutual recognition by member states of different products and possibly legislation to allow funds to appoint a European prime broker.
• Restrictions on institutional investment in many member states: consideration should be given to removing these.
• Minimum investment threshold: as an alternative to possibly restrictive regulatory requirements, there are suggestions that a threshold of €50,000 should be set to filter out small investors.
• Should hedge funds be opened up to the mass retail market? This is a very contentious issue. Some argue that the funds would then have to be subject to the UCITS regulatory regime.

Private Equity

The investment in business provided by private equity plays a crucial role in providing funding for new companies. Regulation, however, varies across the member states and investors can be faced with tax and company law barriers. The experts' report outlined difficulties in cross-border capital-raising and the placement of private equity funds. It did not, however, call for a harmonised European system but for mutual recognition of existing national laws.

Retail investment

This area is governed by the UCITS directive and the experts report suggested a number of legislative changes to this directive to be implemented over the next three years. In particular:

• Action to remove barriers to efficient operation of funds such as delays in authorisation; lack of management passport and inability to merge funds cross-border.
• UCITS to be governed by the Lamfalussy process to allow it to keep up with changes in the market.
• Investor protection should remain a paramount consideration.

Internal Market Commissioner Charlie McCreevy has emphasised the need for flexibility. He said, "Asset management is in massive flux. Commercial horizons of market participants are broadening; business models being reinvented; risk parameters changing. The single market framework must accommodate these changes. The UCITS Directive is struggling to keep pace."

The deputy secretary-general of CESR, Carlo Comporti has expressed concern over the idea of opening up hedge funds to the retail market. He stressed that investor protection must be ensured and that any such funds would have to come within the UCITS regime. CESR has published guidelines and recommendations to the Commission on UCITS.

Stefan Bichsel of the European Fund and Asset Management Association (EFAMA) said, "We welcome the practical solutions for removing existing legal and regulatory inefficiencies and barriers without touching the core principles of the UCITS Directive particularly with regard to investor protection. In view of the degree of urgency, we would like to remind the Commission and CESR that a number of improvements could even be achieved without having to resort to a modification of the Directive."

The UK's Investment Management Association welcomed the expert reports as "a very important step towards cutting costs and enhancing the efficiency of the European asset management industry. It continued, "The simplification of the registration process, facilitating cross-border mergers of funds, the creation of a real passport for management companies and allowing funds to be pooled cross-border, would go a long way to achieving the significant economies of scale."