Osborne takes a stand on hedge funds, but can’t win

Chancellor George Osborne will embark on a martyrdom mission today when he meets fellow European finance ministers for a battle - or "principled stand" - against an EU crackdown on hedge funds which he knows he cannot win.

Hedge funds are seen as one of the financial system's most dangerous sectors, betting against troubled currencies like the euro and countries like Greece and exacerbating their problems. They are also blamed for exaggerating stock market movements, which is why hedge funds were banned from short-selling bank shares during the financial crisis.

When their bets fail and they lose money, hedge funds are so highly leveraged (use borrowed money) that they do not have the capital to cover their losses. Osborne's problem is that 80 per cent of European Union hedge funds are based in London - and much of their money comes from questionable overseas jurisdictions such as the Cayman Islands.

Osborne's meeting with EU finance ministers has been called to discuss proposed new regulations on hedge funds. These include:

• Requiring hedge funds to disclose large short positions to regulators

• Banning short selling in certain cases if financial stability is threatened

• Banning hedge funds based in 'blacklisted' countries that do not comply with strict standards from operating in the EU

• Limits on the amount of money hedge funds can borrow

The United States has already criticised 'blacklisting', saying it is protectionist. However, their opposition may be bought off with the concession that foreign hedge fund managers who agree to follow EU rules will be given a 'passport' to operate there.

A British official told the Press Association: "The Chancellor will take a principled stand, making the case that the UK still has reservations, particularly on the issue of cross-border hedge fund market access."

It seems Osborne’s "principled stand" is this: knowing he will be overruled by France and Germany if he opposes the measures, he will ask them to allow London hedge funds to operate across the EU without having to register in every country - as is currently the case - as a trade-off. ·