EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 14 December 2004 
at the request of the Danish Financial Supervisory Authority on a proposal for a law amending the 
Act on investment associations and special-purpo se associations and other collective investment 
undertakings etc. and the Financial Business Act 
(Hedge funds) 
(CON/2004/38) 
 1. On 25 October 2004 the European Central Bank (ECB) received a request via Danmarks 
Nationalbank from the Finanstilsynet  (Danish Financial Supervisory Authority) on behalf of the 
Økonomi- og Erhvervsministeriet (Ministry of Economics and Business Affairs)  for an opinion on 
a proposal for a law amending the Lov om investeringsforeninger og specialforeninger samt andre 
kollektive investeringsordninger m.v.  (Act on investment associations and special-purpose 
associations and other collective investment undertakings etc.) and the Lov om finansiel 
virksomhed (Financial Business Act) (her einafter the ‘draft law’). 
2. The ECB’s competence to deliver an opinion is b ased on Article 105(4) of the Treaty establishing 
the European Community and the sixth  indent of Article 2(1) of the Council Decision (98/415/EC) 
of 29 June 1998 on the consultation of the Europ ean Central Bank by national authorities regarding 
draft legislative provisions
1 as the draft law contains provisions applicable to financial institutions 
insofar as they materially influence the stability of  financial institutions and markets. In accordance 
with the first sentence of Article 17.5 of the Rul es of Procedure of the European Central Bank, the 
Governing Council of the ECB has adopted this opinion. 
3. The draft law will transpose into Danish law Council Directive 85/611/EEC of 20 December 1985 
on the coordination of laws, regul ations and administrative provisi ons relating to undertakings for 
collective investment in tr ansferable securities (UCITS)2. In addition, the draft law lays down a 
specific legal and supervisory basis for the est ablishment of Danish ‘hedge’ funds. As draft 
national legal acts exclusively transposing direc tives fall outside the scope of Article 2(1) of 
Council Decision 98/415/EC, this opinion is restricted  to covering those provisions of the draft law 
which concern hedge funds and go beyond mere ly implementing a Community directive. 
                                                      
1  OJ L 189, 3.7.1998, p. 42. 
2  OJ L 375, 31.12.1985, p. 3. Direc tive as last amended by Directive 2004/ 39/EC (OJ L 145, 30.4.2004, p. 1). 
2 4. Under the draft law, hedge funds catering to a wide  circle or the general public will be subject to 
approval by the Danish Financial Supervisory Auth ority. It will be optional for funds which have 
only one or a few members to make themselves subject to such approval and thereby become subject to the supervisory regime established by  the draft law. The funds which are approved will 
not be subject to any restrictions in terms of the type of instruments they may invest in or their 
diversification, but the board of each such fund will be required to lay down a risk profile to be 
communicated to the public by means of prospectuses  and by means of its by-laws. The risk profile 
itself will not be subject to approval, but the de positary of the fund, which will be subject to 
approval by the Danish Financial Supervisory Au thority, will be required to ensure compliance 
with this risk profile and to report any non-co mpliance to the Danish Financial Supervisory 
Authority. Approved hedge funds will be required to fulfil the general provisions of the Act on 
investment associations and special-purpose associations and other collective investment undertakings etc. as regards supervision, rules on prospectuses, audit and corporate governance 
requirements. As a consequence of creating a specific system for the supervision of Danish hedge funds, additional amendments to the rules and regulations governing investment management 
companies and depositaries are also proposed to en able these undertakings to  act as depositaries for 
hedge funds.  
5. Hedge funds have attracted the attention of the global financial community because of their 
considerable growth and proliferation as an incr easingly popular alternative investment vehicle. 
The pace of growth of the hedge fund industry i ndicates that hedge funds are becoming important 
non-bank financial intermediaries with potential im plications for the stability of the financial 
system, especially because of their often active a nd highly leveraged trading strategies and their 
growing links to the banking sector. Against this backdrop, the ECB welcomes the fact that the Danish authorities have consulted it on the draft la w and would like to emphasise the importance of 
doing so. 
6. While it is widely recognised that close monitori ng of the development of the hedge funds industry 
is necessary, public debate on whether this should involve direct regulation of hedge funds is still 
ongoing. At the international level, both the Financial Stability Forum in its ‘ Report of the working 
group on highly leveraged financial institutions ’
3 and the IMF in its annual ‘ Global Financial 
Stability Report ’4 have expressed support for efforts by authorities to better understand, monitor 
and influence hedge fund activities. More recently, de velopments in this direction occurred in the 
United States, with the recent adoption by the US Securities and Exchange Commission (SEC) of a new rule which will require many hitherto unregulated advisers to hedge (or ‘private’) funds to 
register with the SEC by 2006
5. At the European level, on 15 January 2004 the European 
Parliament adopted a resolution on hedge funds b ased on a report by its Economic and Monetary 
                                                      
3  Dated 5 April 2000. 
4  Dated 13 September 2004.  
5  Rule 203(b)(3)-2 under the US Investment A dvisers Act of 1940, adopted on 26 October 2004. 
3 Affairs Committee, which proposed a light regulatory regime for hedge funds6. The ECB is 
studying the implications of hedge funds for financial stability and the possible need for a regulatory regime with a view to defining a polic y stance in due course. Hence, the ECB would like 
to note that its views expressed in this opinion ar e without prejudice to the future development of 
its general position on this issue.  This opinion is therefore restricted to technical comments.  
7. The ECB welcomes the overall thrust of the draft law since it lays down a number of disclosure 
requirements which will enhance transparency in relation to the activities of hedge funds and the 
potential risks incurred. The ECB would like to ma ke two remarks, however. First, the draft law 
only applies a compulsory supervisory approval system  to hedge funds catering to a wide circle or 
to the general public while such a system remain s optional for other hedge funds. However, hedge 
funds may incur substantial levera ge and liquidity risks with possible implications for financial 
stability regardless of the scope of distribution to investors. Therefore, a possible extension of the 
disclosure requirements set out in the draft law al so to those hedge funds which are owned only by 
a limited number of members could be explored. Second, the disclosure requirements provided for 
are not very specific, especially with regard to  the components of the risk profile and the ongoing 
information to be provided to investors. In the light of the complexity inherent to hedge funds’ 
activities and the limited number of available mark et benchmarks the possibility of more detailed 
provisions could be assessed with a view to ensuring that investors - particularly in the retail sector 
- are sufficiently informed to adequately assess the risk and performance of hedge funds. 
8. The ECB observes, as also stated in the general e xplanatory notes to the draft law, that there is no 
internationally recognised definition of the term ‘hedge fund’. The term covers a wide range of 
funds with various investment philosophies and de grees of exposure to risk. However, the general 
notes to the draft law identify the following co mmon elements which would seem to characterise 
all hedge funds: (i) clear profit objectives and invest ment strategies, (ii) no legislative limitations 
on the investment freedom of the funds as regards ma rkets, instruments, diversification or leverage, 
and (iii) that the investment adviser invests considerable assets in the fund in return for 
performance-related fees. Many different typ es of entities would be covered by these three 
elements. It is noted that the draft law does not contain any provisions which establish precisely the scope of such funds. Rather, in order to be able to identify the funds covered by the draft law, the 
draft law applies a definition (see Article 114a of the draft law) in the sense that it lays down a 
general description of the activities which hedge fu nds may perform. For reasons of legal certainty 
it might perhaps be helpful to consider whether a more precise definition could be introduced 
stipulating how hedge funds can be distinguished from other kinds of investment funds regulated 
(or not regulated) by Danish law.  
                                                     
 
6  European Parliament resolution P5 TA(2004)0031 on the future of hedge funds and derivatives (2003/2082 (INI)). 
4 9. The ECB confirms that it has no objection to the competent national authorities making this 
opinion publicly available at their discretion. Th is opinion will be published on the ECB’s website 
six months after the date of its adoption. 
  Done at Frankfurt am Main, 14 December 2004. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET