NEWS

Singapore Management University Finance Professor Melvyn Teo argues that the European Union’s proposed hedge fund rules (Alternative Investment Fund Managers Director) will “hurt the very hedge fund investors [the EU regulations] were designed to protect.”

In his essay (“EU Hedge Fund Rules May Hurt Investors,” July 28, Business Times), Teo outlines three areas where EU investors will suffer.

First, the new regulations will “price out” many small hedge funds. “Research has shown that smaller and newer funds tend to deliver higher returns relative to their larger and older competitors, even after adjusting for risk. These emerging fund managers are better poised to take advantage of market opportunities than their less nimble counterparts.”

Second, “my research on Asia-focused funds indicates that, by taking advantage of local information, nearby funds that are located close to their investment markets outperform distant funds. . . .. The new directive may rob EU investors of the option to invest in funds that are located geographically close to their investment markets, for example, Asia-focused funds based in Asia.”

Third, “the new rulings will ramp up co-mingling risk. If the new regulations succeed in walling off non-EU based funds from EU investors, EU investors may end up investing alongside other EU investors only. Because shocks to the wealth of EU investors are correlated, this heightens the risk that a significant proportion of investors will redeem at the same time.”