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If hedge fund managers are looking with despair at poor returns this year, they now have another worry on their plates. Brussels is joining the fray over whether they, together with the private equity industry, should be regulated. However, the EU move, is divided. Centring on the European Parliament, those for are mainly socialists, who are pushing their case with exceptional vigour. Those against are arguing their case with with no less strength of feeling.

The ‘fors' say the EU needs more coherent regulation to minimise the risk of future financial crises. Empirical evidence indicates hedge funds herd, or copy each other, the would-be regulators say. In times of turmoil, such herding threatens general financial stability.

More control, of the private equity industry is essential, says European parliamentarian Poul Nyrup Rasmussen, a Danish socialist, because leveraged by-outs effect the viability of the target companies in cases of extreme debt loads.

Rasmussen argues that there is insufficient EU regulation of hedge funds and private equity. In an unusual procedure, the Danish leftist requested that the Commission to submit to the Parliament, by 30 November 2008, a legislative proposal on the subject. His draft report, which followed a working document - dated March - takes the form of a legislative proposal. If adopted by the Parliament, this would be a strong signal to the European Commission - under EU rules the official initiator of new legislation - to pick up on the issue.

Given the current financial turmoil, Rasmussen says that the current crisis triggered by the US sub-prime market has since expanded to the whole financial system. He does not blame hedge funds and the private equity industry, but says the crisis has revealed their vulnerability as they have strong links with other key actors, such as investment banks, securitisation vehicles, and credit rating agencies.  He adds that all investors, consumers and financial markets will benefit from appropriate regulation.

His proposals are radical. They comprise a single entry point into a single European financial market with a European Union framework for transparency, registration and authorisation for managers of hedge and private equity funds; measures to reduce "extreme risk taking and excessive debt"; steps to ensure the "viability of our private companies through protection against capital depletion"; the setting up of an EU public credit rating agency and a public register for complex, structured credit products; and the establishment of a European financial supervisor to oversee European-wide activities.

Looking for support from beyond the EU borders, the European Socialist Party notes that calls for reform of global financial market regulation include a US Treasury Department blueprint for a modernised financial regulatory structure. That would set standards for financial service providers, such as broker-dealers, hedge funds, private equity funds, venture capital funds and mutual funds.

Rasmussen himself states: "There is now an unstoppable demand for greater transparency and better regulation of the financial markets…For the sake of our pensions, our jobs, our savings and our welfare states, the sooner we take action the better."

However, the broad nature of his approach may be the reason for strong reaction from the centre rightists in the European Parliament. Members of the economic and monetary affairs committee (Econ) have tabled an extraordinarily high number of amendments (123 pages), some of them straight deletions.

Most go further than mere criticism. Typical of the attack on the draft, is one dealing with a motion referring to "insufficient EU regulation". Here, MEP Eoin Ryan, of the UEN parliamentary grouping, comes up with a blunt contradiction. "There is at present national and EU regulation," he suggests.

Among the leaders of the dissenters is the Finnish MEP Piia-Noora Kauppi, who refers to an analysis carried out by the Financial Stability Forum. In 2007, she points out, it concluded that "any concerns specifically relevant to hedge funds or private equity have largely not materialised in the light of the current financial crisis".

In the European Parliament, Rasmussen is currently discussing with his colleagues what next steps should be taken.

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