27 February 2007

AFP: US Treasury says hedge funds don't need new regulation

US hedge funds have enjoyed 'tremendous' growth and gained more financial muscle, but the trillion-dollar industry of private capital pools doesn't need fresh regulation, a senior Treasury official said Tuesday.

Treasury under secretary for domestic finance, Robert Steel, said US financial regulators had moved to boost oversight of hedge funds, but he stressed that new regulations were not needed to enhance policing. 'We reject calling for more regulation just for regulation's sake,' Steel, a former Goldman Sachs executive, said in a speech at the Treasury.

Calls for tougher regulation of hedge funds have mounted in recent months, spurred by the six-billion-dollar implosion of the Connecticut-based Amaranth hedge fund in September which burned some investors with losses of tens of millions of dollars.

Amaranth's meltdown, the biggest hedge fund collapse ever, was largely due to the actions of a single young trader who made a slew of unchecked bets on natural gas futures, according to regulators. Connecticut attorney general Richard Blumenthal and former Securities and Exchange Commission (SEC) commissioner Harvey Goldschmid have both called for new regulations on hedge funds to protect investors.

Concern has also increased because ostensibly conservative pension funds and university endowments have joined the rush to invest in hedge funds despite their secretive trading practices. The SEC, however, is mulling rules that could restrict hedge fund membership to wealthy individuals controlling investments of at least 2.5 million dollars.

Steel spoke after the Treasury released a series of principles and guidelines last week, endorsed by the President's Working Group on Financial Markets, relating to hedge funds. The panel led by Treasury Secretary Henry Paulson urged investors to make sure they fully understand their hedge fund investments, and called on banks and Wall Street brokerages who deal with hedge funds and lend them cash to enhance their risk management.

Blumenthal criticised the voluntary guidelines as 'vague' last week, saying they lacked substance, 'making them unenforceable.'

Under current US laws, hedge funds are not subject to the same public disclosure rules governing banks, trading firms and public corporations.

'A thriving, competitive hedge fund industry brings many benefits to the US economy,' Steel said. 'The principles and guidelines recommend that key counter-parties and lenders commit resources and maintain appropriate policies and protocols to define, implement, and continually enhance sound risk-management practices,' Steel said.

The Treasury official said hedge funds do not operate in a complete black hole, as regulators including the SEC do have 'broad' powers to prosecute wrongdoing including fraud and insider dealing. But risks nonetheless remain, particularly as the industry has expanded at such a break-neck speed, and as some funds operate offshore where regulatory oversight is lax.

'Concerns of systemic risk are more than just theoretical, and we must remain open to the possibility that losses by a highly leveraged institution could threaten the stability of the broader financial system and our economy,' Steel warned.

The four-billion dollar collapse of the Long Term Capital Management hedge fund in 1998 triggered an intervention by the Federal Reserve to stop a feared run on the US financial system. Worries about the industry have also rippled beyond US shores, although Steel said the Treasury's approach is closely aligned with that of Britain's Financial Services Authority watchdog.

Group of Seven finance ministers meeting in Germany earlier this month debated the risks to the global financial system posed by hedge funds and urged greater vigilance of the capital pools. Although estimates vary, due to the industry's secretive nature, the Treasury estimates hedge fund assets under management have rocketed 400 percent since 1999 to 1.4 trillion dollars.

© AFP