Direct or Indirect Regulation of Hedge Funds: A European Dilemma

Abstract

This paper deals with the debate on the methods to regulate hedge funds, with a particular focus on direct or indirect regulation. After having briefly examined the pros and the cons of directly regulating these investment schemes, it comes to the conclusion (largely shared by most scholars) that hedge funds should not be directly regulated, while regulation should concern their management companies and, most of all, their counterparts (lenders in the first place) with a view to managing systemic risk. In addition, regulation should also set precise thresholds for access which should aim at protecting unsophisticated investors from hazardous moves, without, however, falling into the trap of regulating hedge fund themselves.The attention is then turned to the European Union and to its Alternative Investment Fund Managers Directive (AIFMD). An analysis is conducted on some of the most significant approaches to hedge fund regulation which have fuelled (and are partly still fuelling) the debate within EU institutions in its struggle to provide Member States with a valid response to the financial crisis, and on some key provisions of the first level AIFMD. In this light the author concludes that, despite the declared intent to regulated fund managers, the directive often seems to regulate hedge fund themselves. This does not seem to be in line with the thoughts of most scholars and market operators on hedge fund regulation and also looks at odds with other pieces of EU legislation (in particular with the so-called “Newcits”).