Politicians all over Europe are once again turning their attention to the menacing world of high-end financial investment - and they don’t like what they are seeing one bit.

Franz Muentefering, the German vice-chancellor, last week repeated his notorious comparison between hedge fund investors and "locusts". Across the border in France, Nicholas Sarkozy launched another attack on hedge funds, urging a new European tax on "speculative" money flows. Add to that the growing chorus of critics within national parliaments, and it is hard to avoid the conclusion that hedge funds and other active investors are facing a head-on assault.

Few people feel much much sympathy for the managers of hedge funds and private equity groups. They are spectacularly well-rewarded for their labours, and - compared to politicians or managers of listed companies - they face little public scrutiny or the risk of humiliation in the mass media.

All the same, it is hard not to feel a little exasperated with the fund-bashers in Berlin, Paris and Westminster. There is undoubtedly much to be said about the systemic risk posed by the recent dramatic rise in hedge fund activity. I also appreciate that the vast riches associated with the industry cause indignation.

But I still think that - given the virulence of recent attacks on hedge funds and private equity - politicians should at least try to understand the most basic facts about these investor groups before taking aim. Alas, this does not seem to be the case.

Take this quote from Nicholas Sarkozy last week: "Who can tolerate a hedge fund buying a company with debts, firing 25 per cent of staff and then reimbursing them by selling it in pieces? Not me."

His statement is puzzling for many reasons, but mainly because Sarkozy commits the popular error of mixing up hedge funds and private equity firms. Though the boundaries between the two are blurring, hedge funds are not in the business of buying up companies, loading them with debt and then running operations themselves. That is a tactic associated with private equity firms - and even they would undoubtedly have a few words to say about Sarkozy’s caricature of their work.

As Charlie McCreevy, the EU internal market commissioner, pointed out in an FT interview on Tuesday: "Most people who speak about those things don’t know what the difference between hedge funds and private equity is… There are a whole lot of people getting a whole lot of things mixed up – with respect."

What is most concerning is that politicians are mixing up genuine concerns about systemic risk with more populist charges surrounding the allegedly adverse effect that fund managers have on jobs and the long-term health of the companies they invest in.

That this should be so is perhaps no surprise, but it is a shame all the same. Hedge funds and private equity firms are very powerful forces shaping Europe’s financial and corporate future. They should not be immune from scrutiny and attack. But at the moment they are not getting the informed and well-judged criticism they deserve.

February 20th, 2007 in Economic policy | Permalink