The European Union should develop a pension fund vehicle that can be marketed across the region under the same rules and strengthen shareholder protection in order to boost capital markets according to new research commissioned by the Alternative Investment Management Association, a hedge fund industry association.

Having a larger capital market relative to the banking sector is associated with a higher rate of economic growth according to a paper from Christoph Kaserer, professor of finance, chair of financial management and capital markets, TUM School of Management, Munich, and Marc Steffen Rapp, professor of finance, accounting and finance group, School of Business and Economics, Philipps-Universität Marburg, Germany.

The study estimates that growing combined stock and bond markets by one third could fuel a long-term real growth rate in per capita GDP of around 20%, as increased liquidity will lead to more efficient allocation of capital.

The authors said the regulatory environment for funded pension schemes is an extremely important driver for capital market size. The study estimates that increasing the size of pension funds by 10% of GDP could lead to an increase in stock market size of 7% of GDP.

The report said: “Similarly, the broader spectrum of asset managers − from passive investors through to dynamic and active investors such as hedge funds − further complements the effectiveness of capital markets, both in terms of enhancing market liquidity and in terms of providing capital for potentially riskier business investments.”

Another hurdle to capital markets growth in Europe is that institutional investors are more reluctant to invest in firms that are based in countries with weak shareholder protection.

The report said: “Minority shareholder protection rules still differ substantially across Europe with many bank-based European economies still lagging behind the market-based economies.”

The authors said active shareholders, such as hedge funds, can make positive governance changes in the firms in which they invest, by engaging with management.

Jack Inglis, chief executive of AIMA, said in a statement: “This is an important and timely paper which underlines the strong role that capital markets and their participants play in driving economic growth and prosperity. It highlights the positive role that hedge funds and asset managers in general can play, using their expertise and willingness to create positive governance changes in the firms in which they invest.”

The Alternative Investment Management Association was founded in 1990 and has a membership of more than 1,400 firms in over 50 countries.