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Hedge Funds Sweden

Hedge Funds Sweden

Swedish Plan Removes Leverage Limits for Hedge Funds

The Swedish government recently advocated for some reform of the hedge fund industry but warned against "overzealous" regulation.  Now, the Swedish government, which holds the European Union's 6 month alternating presidency, has unveiled a plan that would take away a general limit on hedge funds' leverage.  This runs against the EU Directive aimed at reducing leverage used by buyout firms and hedge funds.  The Swedish government's compromise is to empower regulators to place limits on leverage "where the stability and integrity of the financial system may be threatened."

These limits "should take into account...the market conditions in which the fund operates," the proposal said.  The Swedes' proposal has deleted the passage in the original draft directive that refers to a leverage threshold that "should not be breached at any point in time."

Hedge-fund managers and institutional investors have expressed concern about the original draft of the proposed directive, in particular the permanent limit on leverage.  The draft directive referred to a leverage ratio of 2 to 1 -- that is, borrowing as much again as the amount in the fund -- as "high."
Many hedge-fund managers say they need the freedom to borrow more than that in order to make money.

Fixed-income hedge-fund managers used leverage of as much as 7 to 1 in 2006, according to research prepared by economics consultant Charles River Associates and published last month by the FSA, and even this year, when leverage levels are significantly lower, they typically use leverage of more than 2 to 1.  Source
Read more about the EU Directive here

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