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“The assessment of potential systemic and operational risks associated with hedge funds has become more complex and challenging. Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant,” the G-7 finance officials said in a statement following a summit in Essen on Saturday.
According to news agencies, the G-7 officials felt that further regulation of hedge funds would not only face stiff opposition from financial service providers but also would cause “practical and methodological problems”.
Instead, the officials came out in support of self-regulation on part of the funds, according to the agencies. A voluntary best practice code as well as certification by international rating agencies were cited as examples.
There are currently around 9,000 hedge funds with ԁ.4trn in assets. Many of these funds are domiciled in Anglo-Saxon jurisdictions, including tax havens like the Channel Islands and the Cayman islands.
The German government, which currently holds the G-7 presidency, has in the past supported more regulation of hedge funds. Indeed, hedge funds domiciled in Germany face greater restrictions than in other countries, though the government plans to soon loosen them.
At a news conference on Friday, German finance minister Peer Steinbrück had already warned those in favour of more hedge fund regulation “not to expect much from the summit”.
“But I believe that time, it’s an accomplishment that hedge funds are even part of the agenda for the G-7 summit,” Steinbrück added.
At past summits of G-7 finance officials, discussions of hedge funds were rejected by both the US and the UK delegations, German news reports said.
Meanwhile, Calpers CIO Russell Read told a conference that the Californian pension fund’s hedge fund investment did not even outperform the stock market last year but cost Calpers around $500m (��m) in management fees.
“We can get average market risk very cheaply,” the online news magazine dailyii quoted Read. “We hate paying a performance fee for something we can get very cheaply.”
He predicted that the fee system might change to award managers who perform better than the average. In a study for Cass Business School Professor Harry Kat found recently that 80% of hedge funds cannot justify their fees.