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February 27, 2006
Perception of Hedge Funds in the EU
Well how banks in the European Union define hedge funds is very critical to understanding how they view this sector. Research suggests that EU banks define hedge funds as an unregulated vehicle of investment partnership. A vehicle that uses leverage, derivative instruments, short-selling, arbitrage and other high-risk strategies to achieve targeted levels of risk and return.
The tag ‘unregulated’ is attached since hedge funds only have to fulfill weak disclosure and regulatory requirements, especially regarding capital requirements. Also, most hedge funds are based in offshore locations. While in comparison with standard investment funds, they have longer contractual liquidation, redemption or withdrawal periods of associated certificates/shares.
Most of the EU banks have their own internal definition of a (fund of) hedge fund, which is usually formulated in their internal policy documents. Such definitions are, in general, mostly in line with the working definition floating in the EU region, which contain elements such as “loosely regulated, few restrictions etc.
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