Germany’s hedge fund stance raises concerns

Germany's fourth Financial Market Promotion Act, which was drafted in January and is set to become law in June or July, contains a clause banning short selling during periods of extreme market volatility. This clause is worrying German hedge fund associations that believe German law is already far behind its European counterparts when it comes to hedge fund regulation.

Germany has no specific regulations dealing with hedge funds. Most funds are classified as being offshore, and are regulated under the Foreign Investment Act (FIA), which can levy taxes as high as 40%. The government regulation banning short selling has worried some hedge funds, as short selling has been the best-performing hedge fund style this year, according to US-based advisory firm Van Hedge Fund Advisors.

"While the situation in Germany remains unfavourable for setting up hedge funds, the funds will take their business elsewhere,” said Donald Pepper, executive director at Goldman Sachs, who has been working to develop hedge fund prime brokerage in Germany.

German finance minister Hans Eichel called hedge funds a "potential threat" to financial stability. Eichel also called for increased regulation to be imposed on Germany's hedge fund certificate industry - notes linked to baskets of hedge funds. This industry is estimated to be worth Eur10 billion.

But some believe Eichel's call for increased regulation could help the hedge fund industry. Johan Groothaert, managing director of structured products in global equities at Deutsche Bank, which has one of the biggest hedge fund certificate products in the market, Xavex HedgeSelect, said he supports Eichel’s push to introduce a better hedge fund structure. “Eichel’s comments have to be seen in context. Hedge funds have become a more prevalent investment type. If the hedge fund industry develops a regulatory framework it will be welcomed.”