Jeremy Warner's Outlook: Hedge funds act to head off the regulators

With all eyes on private equity for today's mauling by the House of Commons Treasury Select Committee, this might seem an odd moment for hedge funds to announce they are clubbing together to draw up industry-wide standards of conduct. Hedge funds have been out of the limelight since unions began targeting private equity as the capitalist whipping boy of choice. It might have been better for hedge funds to keep quiet and let private equity else take the flak.

But just because the unions seem to have forgotten about this latter-day breed of financial speculators doesn't mean everyone else has. Never mind private equity, it is the hedge funds which really seem to have got up the nose of Angela Merkel, the German Chancellor. In a speech last January about her forthcoming presidency of the G8, she randomly let it drop that one of her priorities would be to crack down on the evil hedge funds.

This took most of us who witnessed it genuinely by surprise. Ms Merkel no doubt feels passionately about the antics of an industry where Germany has been peculiarly unsuccessful, but do hedge funds really deserve to be up there with global warming, international terror, poverty, corruption and all the other problems of the world? Never let it be said that I'm about to go all soft on hedge fund managers, but all of a sudden one felt almost sorry for them.

In any case, the demonisation of private equity seems to have galvanised the hedge fund industry into action. Acting on the principle that it is better to self-regulate than to hang around until the politicians to do it for you, a group of London's most high-powered hedge funds has recruited Sir Andrew Large, a former deputy Governor of the Bank of England, to conduct a wide-ranging study of the scope for voluntary standards.

This is an important initiative which probably should have been taken quite a long time ago. Hedge funds hide behind a cloak of secrecy and obfuscation with as yet little common ground between them on standardised methods of valuation, risk management assessment or disclosure on fees and much else.

As hedge fund activity mushrooms from cottage industry into the mainstream of asset management, regulators, investors and the public alike all have a growing interest in shining a bright light into the deeper recesses of this hitherto largely hidden world.

Yet whatever Sir Andrew comes up with, I'm not sure it will satisfy Ms Merkel and like-minded Continentals. Her concerns seem to focus more on shareholder activism, short selling, and the potential for new forms of market abuse than a lack of transparency.

With regard to the former, she'll have in mind the merry havoc caused by Christopher Hohn's Children's Investment Trust at Deutsche Borse and ABN Amro. Yet there is never going to be international agreement on what to do about shareholder activism. Not all shareholder activists are hedge funds and by no means all hedge funds are shareholder activists.

Different countries have different views on shareholder rights and there is unlikely ever to be agreement on how they should operate. There are few hedge funds based in Germany and France. Most of them operate out of London, New York and the Far East.

One suspects that it is not so much the activism as that it doesn't originate from Germany which most irks Ms Merkel. If what the German Chancellor wants out of G8 is a crackdown on activism and short selling she'll be waiting until the end of time. America and Britain will never agree such an initiative. Nor does Sir Andrew regard activist as in any way part of his brief.

Rather, he'll be dealing with the more serious issues around disclosure, where there is good reason for concern, a clear-cut case for action and a reasonable chance of reaching common cause. In the meantime, the hedge fund industry would be well advised to learn lessons from the inept way in which private equity has dealt with the public assault on its integrity, tax breaks and purpose. The way things are going, it will be the hedge fund big wigs who find themselves up before the Treasury Select Committee next.

Barclays eagle deserves to be shot

I doubt anyone would seriously regret the passing of the Barclays eagle, a fearsome logo which commands neither trust nor affection. Yet there is nothing which raises the shackles more than learning that the feeble minded Barclays board has surrendered this too in pursuit of its merger with ABN Amro. The logo apparently had to go because of Dutch sensibilities about its Nazi connotations. Never mind that Barclays' use of the bird pre-dates that of Adolf Hitler by more than 200 years, the Dutch were just not having it.

This is perhaps the least of the concessions that Barclays felt obliged to offer to win ABN Amro's hand, yet it is mildly symbolic none the less. Others included locating the combined company's headquarters in Amsterdam and agreeing that the Dutch central bank should become the lead regulator.

It all seems rather academic now. Barclays made these concessions at a time when it was still thought impossible to do a cross-border banking merger within Europe on an unagreed basis. They were part of the price that had to be paid to win ABN Amro's hand.

Yet with the intervention of the Royal Bank of Scotland consortium, it now seems to be open season. If Barclays eventually wins, it is not clear that any of these concessions would be worth the paper they are written on. Yet the one which the Barclays chief executive, John Varley, will in all probability stick to is dropping the Barclays logo. Unlike Royal Bank of Scotland, he plans to keep the Dutch retail bank. It wouldn't pay to offend his customers.

Tesco's UK growth begins to slow

A single quarter is hardly a trend, yet there was no shortage of doom-laden predictions in the City yesterday after a trading update which appeared to show that the Tesco juggernaut is finally beginning to slow. Or at least in the UK it is. In the 13 weeks to 26 May, UK like-for-like sales growth slowed from 5.8 per cent in the previous quarter to "just" 4.7 per cent. Is the Tesco growth story running out of puff?

Hardly. Tesco was never likely to survive four interest-rate rises in a year, with another expected any month now, without some sort of an impact on its top line. What's more, the competition is now a lot tougher than it was. Both Sainsbury, with a trading update today which is likely to show stronger sales growth than Tesco, and Wm Morrison, are currently in turnaround mode. For the first time in ages, Tesco is being forced to swim against the tide.

As I say, this moment was always an inevitable one. Tesco could not forever hope to have the territory all to itself. All of which explains why Sir Terry Leahy, the Tesco chief executive, has been so aggressive about his overseas expansion. On this front, the figures look much more pleasing. International sales were up nearly a quarter at constant exchange rates, helping the group to achieve an overall increase in sales for the first quarter of 10 per cent.

Tesco has not yet entirely run out of road back home. There is still quite a bit of the retail pound left in Britain which as yet is untouched by Tesco - witness the recent bid for the Dobbies garden centres business. Yet the bulk of the growth is now going to come from overseas. Like a general whose lines of supply get increasingly stretched the further he wanders from camp, this is a much more high risk process than Tesco has hitherto engaged in.

Encouragingly, Sir Terry has yet to put a foot wrong, even though he has already wandered far and wide. Yet somewhere out there in the big bad world, there will be a giant banana skin already waiting for the sound of his footstep.

j.warner@independent.co.uk

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