Leading article: Missing the regulatory target

Share
Related Topics

The European Union is establishing new regulations on bonuses paid by financial firms. Only 30 per cent of bonuses will be permitted to be paid upfront in cash. And at least 50 per cent must be deferred for three years. We knew regulation of remuneration in banks was coming. But the surprise is that the new rules will apparently apply to hedge funds too. Is this wise? Not necessarily.

Regulators should take an interest in private-sector remuneration when there is a potential impact of those practices on the public purse. The remuneration systems of "too-big-to-fail" banks, which encouraged recklessness in the boom, clearly enter into that category. But the remuneration systems of hedge funds do not. Many hedge funds went bust in 2008. But, unlike the banks, none was bailed out by governments.

This is not to argue that hedge fund managers are not grotesquely overpaid. Their traditional charging structure – a 2 per cent annual fee on deposits, plus 20 per cent of all profits – is a bad joke considering how badly so many of these firms performed in the 2008 meltdown. The boast of most hedge fund managers to possess a special investing genius turned out to be pure nonsense. And it is an under-reported scandal of the financial crisis that so many pension funds were ploughing money into these funds during the boom years in search of fat returns. Yet the solution is pressure on pension funds to be less idiotic. As for wealthy investors in these high-risk funds, they need to learn their own lessons.

The other problem with regulating pay in the hedge fund sector is that it is a distraction from the more important task of monitoring their activities. Hedge funds, unchecked, can become a systemic risk, as the fate of the US firm, Long Term Capital Management, which required a co-ordinated rescue by the Federal Reserve in 1998, makes clear.

And our regulators also do not seem to understand the symbiotic relationship between large investment banks and their hedge fund clients. The activities of hedge funds might not have been the root cause of the credit meltdown two years ago. But they did help push the nuclear button when they began withdrawing their deposits from investment banks at the height of the panic. This was the notorious run in the world of shadow banking. And this vulnerability in the global financial system still exists.

No one should weep for Europe's hedge fund managers over these minor restrictions on pay. But we should be concerned that a more important regulatory gap is being neglected.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Senior Digital Marketing Consultant

£28000 - £45000 per annum: Recruitment Genius: A Senior Digital Marketing Cons...

Recruitment Genius: Assistant Stores Keeper

£16640 - £18500 per annum: Recruitment Genius: An Assistant Stores Keeper is r...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Software Developer - C# / ASP.NET / SQL

£17000 - £30000 per annum: Recruitment Genius: Developer required to join a bu...

Day In a Page

Read Next
 

General Election 2015: The SNP and an SMC (Salmond-Murdoch Conspiracy)

Matthew Norman
A voter placing a ballot paper in the box at a polling station  

General Election 2015: Despite all the seeming cynicism, our political system works

Ian Birrell
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living