French Chairman of AXA is sadly misguided

It appears that Claude Bebear, founder of the AXA empire, has lot the plot.

He is calling for stringent transparency rules and restrictions on leverage to curb the activities of hedge funds. Most notably he wants there to be differential voting rights based on the longevity of the investment in a company i.e. long term investor gets more votes per share than recent investor.

This is crazy for several reasons, some practical and other philosophical.

  • Long term holders wishing to sell their investments will get lower prices in this environment, since activists will be detered from buying them and hence the market will be deprived of a source of demand. Activitist buy shares with a view to goading management into turning under-performing companies around; if you stop them from doing this or making it more expensive to do so by requiring them to buy even higher stakes, they will look elsewhere. This may well suit cosy French management that are underperforming but not long-term investors
  • Capital markets are inventive places and to circumvent these rules, it would be relatively straight forward for a long term-investor to sell their economic interest via a swap or CFD, whilst retaining the legal ownership. The swap counterparty would then simply instruct the long-term owner how to vote.
  • If you believe private companies exist to make money for investors, why shouldn’t underperforming companies be pushed to create greater value by activist investors rather than left to coast to mediocracy by sleepy investors. Evidently, the AXA Chairman has a different view, perhaps believing firms exist to provide a social service – oddly AXA itself is an aggressive capitalist firm.
  • Hedge Funds activities may well drive prices up because of their financial muscle which is amplified by leverage (investments paid for by borrowing). But guess what, house prices are affected in just the same way and I’ve yet to hear politicians suggest that individuals can only buy houses for which they can provide a 50% deposit.
  • Hedge Funds may well drive prices down through aggressive short selling, but they can only achieve this if there is a market consensus that an asset appears overvalued – if they are wrong, they get punished from rising rather than falling prices.
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