22 February 2007

AFP: US hedge fund panel urges more diligence

A panel of top US financial and securities regulators led by Treasury Secretary Henry Paulson unveiled new guidelines urging enhanced hedge fund oversight Thursday, but no hard regulations to boost policing. The President's Working Group on Financial Markets said the guidelines and principles should help steer US financial regulators in their oversight of the fast expanding, trillion-dollar hedge fund industry.

The panel said the current regulatory structure is working well despite calls by some US lawmakers, Connecticut Attorney General Richard Blumenthal and former Securities and Exchange officials for much tougher oversight.

Under current US laws, hedge funds are not subject to the same disclosure rules governing Wall Street brokerages and other market participants.

The panel urged investors to make sure they fully understand their hedge fund investments, and called on banks and trading firms who deal with hedge funds to conduct strong risk management. It also reminded hedge fund managers, among other recommendations, of their obligations to investors.

A Treasury official, who spoke on condition of anonymity, said the guidelines followed lengthy consultations between industry participants and regulators, but stressed that the Treasury largely believes in self-policing. 'There's not going to be a law or regulation that limits loss,' the official said when asked why the panel had not backed new regulations to oversee hedge funds. 'The regulatory line of sight today is by the counterparties,' the official said, adding that the guidelines should be 'beneficial to industry.'

Investor groups, however, have called for tougher scrutiny of hedge funds which operate largely in secret despite overseeing billions of dollars in securities trading.

Concern has peaked in recent months following the sudden six-billion-dollar meltdown last September of the Connecticut-based Amaranth hedge fund in the biggest hedge fund collapse ever.

The fund's implosion, which caused investors to lose tens of millions of dollars, was largely tied to the actions of a single young trader who made a series of unchecked and disastrous bets on natural gas futures.

The guidelines were released a day after Goldman Sachs, where Paulson served as chief executive until departing last June to become Treasury secretary, said it had paid Paulson 51 million dollars in buying back stakes he and his wife owned in various hedge funds and private equity funds managed by Goldman.

© AFP