Hedge funds look likely to face greater regulation. Last December, the European Commissioner for internal market and services, Charlie McCreevy, launched a wide-ranging public consultation on the supervision and risks of hedge funds.

McCreevy said: "I do recognise the value of good, appropriate regulation. Some of you have said I have been sitting idly in my office doing nothing for the last four years. While I accept that some of this criticism may be attributable to what we call the political game, I think it is time to set the record straight."

However, a few jaws dropped when he said the review is to be concluded as soon as January and discussed in detail in February, only months before his mandate is to end. The EU had been divided so far on the topic and the general perception was those in favour were mainly socialists, pushing their case with exceptional vigour, while those against did not use any less vigour in their lobbying.

McCreevy budged following "intense pressure" from the Parliament in September when a formal request from a group of MEPs to the European Commission demanded new legislation to improve the regulation of financial markets related, in particular, to hedge funds and private equity.

The group united after the earlier publication of the Rasmussen Report on hedge funds and private equity, written by Danish socialist and European parliamentarian Poul Nyrup Rasmussen. The report was adopted with 562 votes in favour, 86 against and 25 abstentions, heralding the end to Brussels' fray over whether hedge funds, together with the private equity industry, should be regulated.

Unsurprisingly, McCreevy had been reluctant to conduct such a review and was wary of the subsequent list of measures against hedge funds. So his words were unexpected when he said "our preliminary analysis indicates that the majority of the issues which warrant further investigation relate to the activities of hedge funds".

Officials have since tried to play down the effect the consultation might have on the alternative asset management industry. In his speech
to the Economic and Monetary Affairs Committee, McCreevy stressed any new rules must not aggravate the credit crisis.

A week later, Niall Bohan, head of the asset management unit at the Commission reluctantly revealed plans for an additional review of short-selling, adding that it was also considering possible bans on the practice, while seeking to organise stock-lending.

Bohan told delegates at the Edhec alternative investment days the industry should brace itself for a wider global regulatory rethink, drawing attention to a regulatory gap on European level. "Short selling is certainly going to be an area that will be part of this global regulatory rethink." Moreover, the market which has developed on the back of stock lending and stock borrowing will need to be codified and organised, since the weaknesses in this market have been a big source of disruption for the financial markets recently.

While Bohan tried to pacify the audience with the promise that the wide-ranging review's objective is it will be undertaking at the right level, and that short-term action should be avoided, hedge fund representatives were taken aback.

Antonio Borgess, chairman of the Hedge Fund Standards Board - custodian of the best practice standards published by the Hedge Fund Working Group - condemned the prospect of a "regulatory train", stressing the right measures are needed. He protested that banning short-selling would make the market more ineffective, pleading that self-regulation is the way forward.

Still, Stephan Howaldt, chief executive of Hermes Focus Asset Management Europe, owned by the UK's largest pension fund, the BT Pension Scheme, pleaded for the review, adding standards should ensure that "shorting does not get in the way of the interest of society and companies".

Indeed, more initiatives of self regulation in the alternative asset management sphere are springing up within the industry, also from pension funds.

Ruud Hagendijk, chief executive of Dutch pension service provider Mn Services, recently called for more rigorous self-regulation of private equity houses and hedge funds so pension funds can work with them "with a clear conscience".