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It was only a matter of time, wasn't it? Amidst chaotic financial markets, unsettled investor sentiment and hedge fund redemptions, the German politicians who dubbed hedge funds as 'locusts' are again seeking to rein in alternative fund managers.

The Social Democrats, junior partners in the Berlin coalition led by Chancellor Angela Merkel's Christian Democrats, have drawn up proposals for restrictions on investment by hedge funds and private equity with the backing of Finance Minister Peer Steinbrück, a member of the party.

The proposals include limiting the scope of pension funds to invest in private equity, scrapping tax-free divestment of private-equity stakes, curbing 'excessive leverage' and forcing private equity firms to pay 5 per cent of their profit on exit to the workforce of the portfolio company concerned. Hedge funds would have to pay higher taxes and would not be allowed to invest in Europe if they were domiciled in offshore tax havens.

In 2005, following the success of hedge funds in forcing Deutsche Börse to drop its bid for the London Stock Exchange and in ousting the organisation's chairman and chief executive, then Social Democrat chairman Franz Münterfering famously described them as locusts.

But the party has not always been so hostile to private equity. Earlier this decade, the Social Democrats gave their backing to private equity funds as a means to finance company expansion amid fears that the Basel II rules on capital adequacy would constrain lending by banks.

Long before the current financial market crisis blew up, Germany (and sometimes France) have been pushing for greater regulation of hedge funds within the European and repeatedly trying to get the issue onto the agenda of G8 summits. Although Steinbrück's Christian Democrat colleagues say the report includes 'deliberate misunderstanding', this time the calls for increased regulation may not go away so easily.


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