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Regulators, including the Treasury, Federal Reserve and Securities and Exchange Commission, released a set of 'principles and guidelines' last week representing the latest thinking on hedge fund regulation since the near-collapse of Long Term Capital Management in 1998.
But they stopped short of tighter federal regulation, instead calling on hedge fund creditors and counterparties to improve risk management and investors to improve due diligence before investing.
Robert Steel, undersecretary for domestic finance, acknowledged in a speech that 'a vocal few' had called the guidelines 'vague' and 'unenforceable'.
William Galvin, Massachusetts state secretary, said last week the decision to leave hedge fund risk to the workings of the markets was 'simply the wrong approach to an increasing problem'.
However, Mr Steel said: 'The president's working group did not view this issue through an anti-regulatory lens. In fact, if the group believed that our regulators needed more authority to address these issues, secretary Paulson would have led the charge in asking for it.'
'The issues and challenges presented are complex and cannot be solved with a one-time regulatory fix,' he said. Instead, the risks posed were best addressed through 'market discipline, disclosure and transparency'.
Mr Steel said: 'Let's be clear here: hedge funds are not immune to challenges. With as many [hedge fund] strategies as exist today, it should not be news or a surprise when a specific strategy is unsuccessful. Just because a strategy is not working does not mean that more regulation is necessary.'