TAMING THE LOCUSTS? EMBATTLED HEDGE FUNDS IN THE EU

The recent financial crisis and the ongoing sovereign debt crisis have put the spotlight on the traditionally secretive and opaque hedge fund industry. Widespread financial losses have provoked popular suspicion against hedge funds, which are viewed as speculators that destabilize the financial system. Adhering to the pattern of crisis-driven financial regulation, the European Union has enacted legislation that is expected to radically transform the hedge fund industry in Europe. While it may seem at first glance that only the Alternative Investment Fund Managers Directive and its complex and burdensome requirements for hedge funds and their managers is expected to directly impact the hedge fund industry, the effect of the Short Selling Regulation and the Proposal for a Financial Transaction Tax will be equally devastating for hedge funds by curtailing their investment techniques and market operations. This article argues that the European Union has engaged in a crisis-driven regulatory spree and that this regulatory overhaul is founded on perceptions and popular beliefs rather than actual evidence. In regulating hedge funds, the E. U. has moved forward with regulating not only hedge funds and their managers, but also their investment techniques and market operations. The cumulative impact of the E. U.'s regulatory spree is expected to be a sharp increase in costs for hedge funds operating in Europe and a decline in investor returns with negative consequences for European investors and markets. Thus the term "embattled" hedge funds.