16 April 2007

G7 looks at global code of conduct for hedge funds

Group of Seven leaders, increasingly wary of the growing financial clout of hedge funds, will probably push for a global code of conduct for the industry, Germany's central bank president said on Sunday. 'Something like a voluntary code of conduct,' German central bank president Axel Weber said in a panel discussion organized by France.

Germany, which currently holds the rotating G7 presidency, and the United States organized a separate meeting with about two dozen hedge fund representatives on Sunday.

The U.S. Treasury, in a statement following that meeting, gave few details about what was discussed but alluded to the myriad regulatory environments for hedge funds.

'The discussion with private sector participants focused on best practices on risk management, current hedge fund and private equity regulations and disclosure issues, including a discussion of best practices,' the Treasury statement said.

Weber gave his own eliptical view of the difficulty for financial leaders in getting to grips with a group of investors with more than $1 trillion of buying power.

'It's a great industry, it's very successful, it's rapidly growing. We couldn't do without it, but....' Weber said, pausing for effect after the last word.

The meeting aimed to muster some enthusiasm within the hedge fund industry for regulation. German Chancellor Angela Merkel wants something substantive done about hedge funds by the time she hosts a summit of world leaders in June.

Bank of France Governor Christian Noyer, at the panel discussion, said hedge funds now accounted for up to 40 percent of trading in some stock markets, and while still a small part of the overall financial market were increasingly intertwined with traditional banks.

These banks, pillars of the financial system, now depended on hedge funds for much of their revenue, he said.

Highly leveraged hedge funds are less regulated than banks or mutual funds and can use techniques that others cannot, such as short-selling securities, or betting stock prices will fall.

The Bank of France, in a compendium released during G7 and IMF meetings in Washington, published a series articles on hedge funds penned by some of its panelists.

In one of them, Philipp Hildebrand of Switzerland's central bank said hedge funds still accounted for a small portion of financial markets, with an estimated $1.4 trillion of assets under their management compared to an estimated global market worth of around $150 trillion.

But there was still good reason for worrying about them, even if the risk of systemic trouble was small.

A G7-commissioned report on hedge funds and risk control will be completed by year-end, but a preliminary version will be ready in May, Italy's Mario Draghi said.

Draghi, head of the Bank of Italy, is also in charge of the Financial Stability Forum, a Zurich-headquartered body set up after the Asian financial crises of the 1990s and now working on the hedge fund report.

Draghi spoke to G7 finance ministers and central bankers at their meeting on Friday in Washington, but he made it clear that stringent regulation was not the idea.

'To contain potential financial stability risks, we need to strengthen counterparty discipline and reinforce it through stronger supervisory oversight of credit providers,' he said.

© Reuters