After the crisis: The regulation of hedge funds and private equity in the EU

European Business Organization Law Review

Volumn 12, Issue 3, 2011, Pages 379-414

  Ferran, Eilís ^a  

^a UNIVERSITY OF CAMBRIDGE   (United Kingdom)

Author keywords

Alternative Investment Fund Managers Directive; European Union; financial crisis; hedge funds; private equity; reform

Indexed keywords

EID: 82655162515     PISSN: 15667529     EISSN: 17416205     Source Type: Journal    
DOI: 10.1017/S156675291130002X     Document Type: Article

References (153)

1. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ 2011 L 174/1.
2. FSA, Hedge Funds: A Discussion of Risk and Regulatory Engagement (DP 05/04), at p. 10.
3. IOSCO Technical Committee, Hedge Funds Oversight (June 2009), para. 5.
4. IOSCO Technical Committee, Private Equity Conflicts of Interest (FR11/10, November 2010), Ch. 3, provides an overview of the private equity market.
5. FSA, Private Equity: A Discussion of Risk and Regulatory Engagement (DP06/06), at pp. 37-8 (identifying where leverage can occur in private equity investments).
6. A. Berg and O. Gottschalg, 'Understanding Value Generation in Buyouts', 2 Journal of Restructuring Finance (2005) p. 9.
7. C. Martin, 'Private Equity: Hedge Funds' Impact - An Exploration of the Wider Impact of Hedge Funds on Private Equity, and the Overlap between the Two Sectors', 18 Practical Law for Companies (2007) p. 19;
8. H.B. Shadab, 'Coming Together after the Crisis: Global Convergence of Private Equity and Hedge Funds', 29 Northwestern Journal of International Law & Business (2009) p. 603.
9. IOSCO Technical Committee, Private Equity (May 2008), at p. 11.
10. FSA, Assessing Possible Sources of Systemic Risk from Hedge Funds (2010), at pp. 1-2;
11. FSA, Financial Risk Outlook 2010, at p. 45.
12. W.W. Bratton, 'Hedge Funds and Governance Targets', 95 Georgetown Law Journal (2007) p. 1375.
13. H.T.C. Hu and B.S. Black, 'The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership', 79 Southern California Law Review (2006) p. 811.
14. M. Tresnowski, Testimony on behalf of the Private Equity Council before US Senate Committee on Banking, Housing and Urban Affairs, 15 June 2009 (listing reasons for not regarding private equity as a source of systemic risk).
15. E.g., at the peak of the market, the listed parent company of a new Candover fund committed 1bn to the fund and sold bonds to fund the commitment. Meeting the bond covenants later became a major problem. Facing the prospect of breaching the bond covenants, the parent company was forced to admit that it could not meet its commitment to the fund and the fund had to be suspended.
16. A. Brav, W. Jiang, F. Partnoy and R.S. Thomas, 'Hedge Fund Activism, Corporate Governance, and Firm Performance', 63 Journal of Finance (2008) p. 1729;
17. M. Kahan and E.B. Rock, 'Hedge Funds in Corporate Governance and Corporate Control', 155 University of Pennsylvania Law Review (2007) p. 1021;
18. J. Armour and B.R. Cheffins, 'The Rise and Fall (?) of Shareholder Activism by Hedge Funds', Journal of Alternative Investments (2011, forthcoming);
19. M. Becht, J. Franks and J. Grant, 'Hedge Fund Activism in Europe' (26 May 2010), ECGI - Finance Working Paper No. 283/2010, available at SSRN: (accessed May 2011).
20. E. Wymeersch, 'The Regulation of Private Equity, Hedge Funds and State Funds' (30 April 2010), Financial Law Institute Working Paper No. 2010-06, available at SSRN: (accessed May 2011).
21. On the European position, see generally P. Athanassiou, Hedge Fund Regulation in the European Union: Current Trends and Future Prospects (Kluwer Law International 2009).
22. European Commission, Green Paper on the Enhancement of the EU Framework for Investment Funds COM (2005) 314, para. 3.4.
23. European Commission, Decision Setting up a Group of Experts to Report on Ways to Improve the Efficiency of the EU Investment Fund Market C(2005) 4653.
24. ECB, Green Paper on the Enhancement of the EU Framework for Investment Funds: Eurosystem Contribution to the Commission's Public Consultation (ECB, November 2005).
25. See also T. Garbaravicius and F. Dierick, 'Hedge Funds and Their Implications for Financial Stability' (August 2005), ECB Occasional Paper No. 34, available at SSRN: (accessed May 2011).
26. A.W. Lo, 'Hedge Funds, Systemic Risk, and the Financial Crisis of 2007-2008: Written Testimony for the House Oversight Committee Hearing on Hedge Funds' (13 November 2008), available at SSRN: (accessed May 2011).
27. In particular, the 2006 implosion of Amaranth Advisors LLC with a loss of around $6 billion did not have systemic repercussions.
28. ECB, Large Banks and Private Equity-sponsored Leveraged Buyouts in the EU (April 2007), at p. 5.
29. European Parliament Resolution of 15 January 2004 on the Future of Hedge Funds and Derivatives (T5-0031/2004); European Parliament Resolutions of 27 April 2006 on Asset Management (T6-0181/2006) and of 13 December 2007 on Asset Management II (T6-0627/2007);
30. European Parliament Resolution of 11 July 2007 on Financial Services Policy (2005-2010), para. 19 (T6-0338/2007).
31. I. van den Burg and P.N. Rasmussen, Hedge Funds and Private Equity: A Critical Analysis (PES, March 2007).
32. D. Hencke and P. Inman, 'Private Equity Deals Threaten Capitalism', The Guardian, 23 May 2007, p. 28.
33. J. Warner, 'Outlook: Deutsche Börse's Seifert Is Devoured by a Plague of Anglo-American Locusts', The Independent, 10 May 2005, p. 63, reporting comments by Franz Müntefering, the then chairman of Germany's Social Democratic Party.
34. I. Simensen, 'Activist Investors Seek Success in Germany', Financial Times, 7 December 2007, p. 17.
35. For insights into motivations underlying German efforts to push for tighter control of hedge funds, H. Zimmermann, 'Varieties of Global Financial Governance: British and German Approaches to Financial Market Regulation', in E. Helleiner et al., eds., Global Finance in Crisis: The Politics of International Regulatory Change (Routledge 2010) pp. 121-136.
36. P. Betts, 'Seismic Shocks Shake Norway's Cosy Capitalism', Financial Times, 7 November 2007, p. 18;
37. I. Bickerton, 'Dutch Left Asking Who Is Boss', Financial Times, 21 April 2007, p. 14;
38. J. Plender, 'European Politicians Demonise Hedge Funds Again', Financial Times, 18 September 2006, p. 22 (commenting on odium poured on hedge funds by the Swedish prime minister in the run-up to an election);
39. Leader Column, 'Playing with Fire: Sarkozy's Populism Could Burn Down the EU House', Financial Times, 5 April 2007, p. 14.
40. In early 2007, IOSCO established a Task Force to investigate private equity: IOSCO, An Overview of the Work of the IOSCO Technical Committee (March 2007), at p. 17.
41. See Table 1 (below) for outputs from this project.
42. J. Horsfield-Bradbury, 'Hedge Fund Self-Regulation in the US and the UK' (2008), available at: (accessed May 2011).
43. A short-lived attempt by the SEC to bring hedge funds more fully under official oversight is discussed in T. Paredes, 'On the Decision to Regulate Hedge Funds: The SEC's Regulatory Philosophy, Style, and Mission', University of Illinois Law Review (2006) p. 975.
44. Managed Fund Association, Sound Practices for Hedge Fund Managers (first launched in 2000), available at: (accessed May 2011);
45. Hedge Funds Standards Board, Better Practice Standards (launched 2008), available at: (accessed May 2011).
46. Also various Guides to Sound Practices published by the Alternative Investment Management Association, available at: (accessed May 2011).
47. Guidelines Monitoring Group, Guidelines for Disclosure and Transparency in Private Equity (November 2007), available at: (accessed May 2011).
48. IPEV, International Private Equity and Venture Capital Guidelines (introduced 2005, updated September 2009).
49. EVCA, Code of Conduct (October 2008). Other industry standards maintained by the EVCA are available at: (accessed May 2011).
50. In particular, President's Working Group Principles and Guidelines Regarding Private Pools of Capital (February 2007), which called for adherence to industry sound practices.
51. The President's Working Group (PWG) comprises the US Treasury Secretary and the Chairs of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Later in 2007, the PWG sponsored the establishment of two private sector committees to develop best practices.
52. This resulted in: Best Practices for the Hedge Fund Industry (PWG Asset Management Committee, January 2009);
53. Principles and Best Practices for Hedge Fund Investors (PWG Investors Committee, January 2009).
54. See Table 1 (below) for G8/G20/FSF&FSB/IOSCO encouragement in 2007-8 of the development of industry best practice standards. The work of the PWG committees continued into this period.
55. But private sector efforts appear to have had limited success. In a joint initiative steered by IOSCO in 2008 the various private sector bodies combined to produce the 'Hedge Funds Matrix', which was designed to be a first step towards harmonisation of existing hedge fund industry sound practices. However, this Matrix has not been kept up to date: (accessed May 2011).
56. H.W. Sinn, Casino Capitalism (OUP 2010), at pp. 155-6.
57. M. Arnold and P. Stafford, 'Candover to Call It a Day as Credit Crunch Takes Its Toll', Financial Times, 1 September 2010, p. 15 (suspension of fund when parent company was forced to admit that it could not meet its funding commitment; parent indicated that it would wind itself up).
58. Arguing that hedge funds reduced the impact of the financial crisis and boosted recovery: H.B. Shadab, 'Hedge Funds and the Financial Crisis' (January 2009), Mercatus on Policy, No. 24, Jan. 2009, NYLS Legal Studies Research Paper No. 09/10 #31, available at SSRN: (accessed May 2011).
59. One of the many statements to this effect from public sector bodies and officials can be found in IOSCO's Hedge Funds Oversight Report (June 2009), Introduction, para. 14.
60. IOSCO, Regulation of Short Selling (Report, 2009), para. 1.3 (noting 'general concern' that short selling could contribute to disorderly markets).
61. However, the emergency bans on short selling imposed during the crisis had mixed effects: E. Avgouleas, 'A New Framework for the Global Regulation of Short Sales: Why Prohibition Is Inefficient and Disclosure Insufficient', 16 Stanford Journal of Law, Business, and Finance (2010) p. 55.
62. D. Brewster and J. Chung, 'Hedge Funds Face Crackdown in the Wake of Madoff Affair', Financial Times, 30 December 2008, p. 1.
63. Joint Forum, Review of the Differentiated Nature and Scope of Financial Regulation: Key Issues and Recommendations (January 2010), at p. 9.
64. In its Hedge Funds Oversight Report (June 2009), IOSCO's Technical Committee Task Force indicated that it had focused on hedge funds rather than dealing with other potentially 'unregulated' entities such as private equity funds because of the G20's particular interest in hedge funds. However, it noted that many of its observations and conclusions could be applicable to other market participant entities holding or controlling large pools of capital.
65. J. Chung, K. Guha and G. Tett, 'The Cost of a Lifeline - Humbled Financial Groups Brace for More Regulation', Financial Times, 24 April 2008, p. 9.
66. R. Atkins, 'Merkel Vents Annoyance over US and UK', Financial Times, 22 September 2008, p. 3.
67. Lex Column, 'The Italian Locust', Financial Times, p. 18.
68. K. Guha, 'Leaders Aim for Concerted Response to Foster Growth', Financial Times, 14 November 2008, p. 10;
69. K. Guha, 'Leaders Open the Way to Wide Reforms', Financial Times, 17 November 2008, p. 6.
70. Congressional Oversight Panel, Special Report on Regulatory Reform (January 2009) (calling for, inter alia, the extension of regulation to hedge funds and other elements of the 'shadow' banking system.
71. On the change in US domestic politics relating to hedge funds: E. Helleiner and S. Pagliari, 'The End of Self-Regulation? Hedge Funds and Derivatives in Global Financial Governance', in Helleiner, Pagliari and Zimmermann, p. 74, at pp. 77-80.
72. L. Summers, 'Responding to an Historic Economic Crisis: The Obama Program', Speech, Brookings Institution, Washington, DC, 13 March 2009, text of speech available at: (accessed May 2011).
73. Remarks by the President and Treasury Secretary Geithner after Economic Daily Briefing, 11 March 2009, text available at: (accessed May 2011).
74. D. Paletta and J. Strasburg, 'Treasury Maps New Era of Regulation', The Wall Street Journal, 27 March 2009, A1.
75. C. Bryant, 'EU Leaders Push Regulation', Financial Times, 23 February 2009, p. 1.
76. In addition to the materials mentioned in Table 1, see also FSA, The Turner Review (FSA, March 2009), at p. 73, which draws a careful distinction between transparency-oriented reforms and the imposition of prudential controls on hedge funds. Lord Turner considered that the latter would be appropriate only if hedge funds became bank-like or otherwise of systemic significance.
77. HM Treasury & FSA, European Commission Consultation on Hedge Funds: Response (January 2009), at p. 6.
78. European Commission, DG Market Services, Summary of Reponses to Hedge Funds Consultation Paper (March 2009), at pp. 8-9.
79. E.g., M. Barnier, Conference Keynote Speech 'Delivering on the EU's G20 Commitments' (Berlin, 20 May 2010), text of speech available at: (accessed May 2011).
80. European Commission Statement at the Occasion of the European Parliament Vote on the Directive on Hedge Funds and Private Equity, MEMO/10/573, 11 November 2010
81. Art. 192 EC, now Art. 225 TFEU. House of Lords European Union Select Committee, Directive on Alternative Investment Fund Managers (HL 48-I & II, February 2010), para. 17.
82. European Commission, Consultation Paper on Hedge Funds (December 2008, Working Document of the Commission Services (DG Internal Market)).
83. C. McCreevy, Opening Speech, EC Conference on Private Equity & Hedge Funds, Brussels, 26 February 2009), text of speech available at:
84. J. Burns, 'Pushed for Action', The Sunday Times, 21 December 2008, Features Section, p. 16 (reporting MEPs' loss of confidence and trust in Ireland's European Commissioner);
85. D. Gow, 'Hedge Funds and Private Equity Try to Head Off Tighter EU Controls: Self-Regulation Has Failed, Declares ECB Chief Trichet: McCreevy Removed from Overseeing Tighter Rules', The Guardian, 24 February 2009, p. 28.
86. Council (ECOFIN), Key Issues Paper (6784/2/09 REV 2, March 2009), at p. 3.
87. European Council, Presidency Conclusions 19/20 March 2009 (7880/1/09 REV 1), at p. 16.
88. A. Evans-Pritchard, 'Europe Gets Tough on Hedge Funds', Daily Telegraph, 23 February 2009, p. 1 (City section) (reporting outcome of mini-summit in Berlin);
89. L. Quaglia, 'The "Old" and "New" Political Economy of Hedge Funds', 34 West European Politics (2011) p. 665.
90. Formally entitled Report of the High-Level Group on Financial Supervision in the EU (February 2009).
91. Quoted in T. Barber and N. Tait, 'Paris Pushes EU to Impose Tighter Regulation on Hedge Funds', Financial Times, 6 May 2009, p. 7.
92. P. Marshall, 'Europe's Classic Exercise in Defending Its Interests', Financial Times, 18 May 2009, p. 9.
93. After some delay, formal adoption by the Council took place in May 2011.
94. European Parliament, Background Note on the Alternative Investment Fund Managers Directive. Differences between Commission, Parliament and Council Texts, available at: (accessed May 2011).
95. This provides a useful summary of key differences between the initial Commission, Parliament and Council texts and of the eventual outcome.
96. Report on the proposal for a directive of the European Parliament and of the Council on Alternative Investment Fund Managers (A7-0171/2010) (ECON, Rapporteur: Jean-Paul Gauzès).
97. Q. Peel, 'Germany Presses UK on Hedge Fund Regulation', Financial Times, 18 March 2010, p. 6.
98. Rec. 10.
99. Art. 4(1)(a).
100. Art. 3.
101. Art. 2.
102. Art. 7. 'Home state' is defined in Art. 4(1)(q). The Directive provides a system for determining a 'reference' Member State to be responsible for oversight of a non-EU fund manager.
103. Art. 9.
104. Art. 13.
105. On which, see E. Ferran, 'New Regulation of Remuneration in the Financial Sector in the EU' (Working Paper, forthcoming, 2011).
106. Arts. 14-18.
107. Art. 19.
108. Art. 21.
109. Arts. 22-24.
110. Art. 15(4).
111. Art. 4(3).
112. Art. 23(5).
113. Art. 24(4).
114. Art. 24(5).
115. Art. 25.
116. Art. 25(3).
117. Art. 25(7)-(8).
118. Arts. 26-30. An 'issuer' in EU capital markets law means an issuer with shares admitted to trading on a regulated market. Under AIFMD a 'non-listed company' means a company that does not have shares admitted to trading on a regulated market.
119. Art. 26(2).
120. Art. 27.
121. Art. 26(2).
122. Arts. 26(4) and 28.
123. Art. 28(4).
124. Art. 28(5).
125. Art. 29.
126. Art. 30.
127. 'Geithner Criticizes France's Opposition to EU Hedge-Fund Plan', dowjones.com, 26 October 2010;
128. N. Tait and T. Braithwaite, 'France Paves Way for Accord on Funds', Financial Times, 7 October 2010, p. 8.
129. D. Charter and M. Costello, 'French Set to Stall European Hedge Fund Directive', The Times, 29 September 2010, p. 34.
130. D. Charter, 'Compromise Paves Way for European Hedge Fund Rules', The Times, 20 October 2010, p. 53. ESMA's powers were enhanced as part of this compromise but the granting of passports remains within the remit of national authorities.
131. E. Ferran, 'Understanding the New Institutional Architecture of EU Financial Market Supervision' (1 November 2010), University of Cambridge Faculty of Law Research Paper, available at SSRN: (accessed May 2011).
132. S. Grene, 'A Sector Spooked and Struggling to Survive', Financial Times, 12 January 2009, p. 13 (Surveys).
133. K. Burgess, 'Suspect Strategies', Financial Times, 23 June 2010, p. 9 (Surveys) (discussing closure of Atticus funds, which had played a prominent role in the Deutsche Börse incident).
134. M. Arnold, 'Lack of Deals Sparks Private Equity Shake-up', Financial Times, 10 September 2009, p. 19.
135. J. Guthrie, 'Candover's Humbled Barbarians Ready Rummage Sale', Financial Times, 1 September 2010, p. 16.
136. H. Ebrahimi, 'Largest Hedge Funds Take Bulk of Inflows Despite Volatility', Daily Telegraph, 21 July 2010, p. 4 (Business Section).
137. S. Jones, 'Hedge Fund Bonuses Signal Rosier Times', Financial Times, 5 November 2010 (ft.com);
138. S. Jones, 'Corporate Ambitions', Financial Times, 27 September 2010, p. 12 (Surveys).
139. A. Ross, 'Private Equity Still Showing Value, But Only for Long Term', Financial Times, 12 September 2009, p. 9 (Surveys);
140. S. Johnson, 'Signs of Life in a Crisis-damaged Sector', Financial Times, 26 July 2010, p. 5 (Surveys);
141. G. Zuckerman, 'Blackstone Says Buyouts Overheated', The Wall Street Journal, 29 October 2010, C1.
142. TheCityUK, Global Financial Markets - Regional Trends (November 2010), at p. 5.
143. R. Sullivan, 'Industry Mulls over Alternatives Directive', Financial Times, 22 November 2010, p. 3 (Surveys), quoting a spokesperson for the British Private Equity and Venture Capital Association as admitting that 'on balance the directive is viable', albeit 'a compromise and not ideal'.
144. Slaughter and May, The Alternative Investment Fund Managers Directive: A Tolerable Compromise? (November 2010).
145. Charles River Associates, Impact of the Proposed AIFM Directive across Europe (October 2009).
146. SEC and CFTC, Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF (Joint Proposed Rules, January 2011).
147. Cadwalader, Hedge Fund Regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Clients & Friends Memo, July 2010).
148. But see D. Awrey, 'The Limits of EU Hedge Fund Regulation', Law and Financial Markets Review (forthcoming, 2011), for a quite pessimistic view on how things are likely to turn out.
149. European Commission, Regulating Financial Services for Sustainable Growth, COM (2010), at p. 301.
150. N. Moloney, EC Securities Regulation, 2nd edn. (OUP 2008), at p. 335.
151. See, in particular, the dispute over order-execution rules in the Markets in Financial Instruments Directive, Directive 2004/39/EC, OJ 2004 L 145/1, which, amidst much acrimony, were adopted in spite of opposition in the Council from a number of Member States, including the UK.
152. See also N. Moloney, 'EU Financial Market Regulation after the Global Financial Crisis: "More Europe" or More Risks?', 47 Common Market Law Review (2010) p. 1317, at pp. 1337-8.
153. In the pre-crisis period, the performance of the Parliament in the somewhat stormy negotiations over MiFID had attracted some praise: M. McKee and N. Augry, 'MiFID: Where Did It Come from and Where Is It Taking Us?', 22 Journal of International Banking Law and Regulation (2007) p. 177.