Download G-7 recommends vigilance on hedge funds

G-7 recommends vigilance on hedge funds
By Carter Dougherty
Published: February 11, 2007
ESSEN, Germany: Finance ministers from the world's leading economies put the $1.4 trillion hedge fund industry firmly on
the international policy agenda over the weekend, saying that they would scrutinize the sector closely with an eye toward
encouraging more self-regulation.
Representatives from the Group of 7 countries, who met in the industrial center of the host country, Germany, issued a
statement saying the practices of hedge funds, which have drawn growing concern among financial policy makers over
the past few years, had "become more complex and challenging" in light of the industry's prominence and volatility.
"Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant," the ministers
said. "We therefore agreed to further pursue the issue."
Hedge funds, which manage vast pools of capital and operate largely outside regulatory scrutiny, have grown to become
some of the largest and most important players in markets around the world, particularly on Wall Street and in London.
Fortress Investment Group, the first hedge fund in the United States to go public, saw its shares rise 67.6 percent Friday,
their first day of trading.
At the meeting Saturday, even the U.S. Treasury secretary, Henry Paulson Jr. — whose former firm, Goldman Sachs,
profits immensely from its relationship with hedge funds — said hedge funds needed more attention from policy makers.
"I can't imagine we could be doing our jobs, those of us responsible for financial regulation, without talking about this
topic," Paulson said.
Policy makers worry that a major hedge fund failure could endanger the stability of the funds' lenders, which tend to be the
biggest international investment banks, leading to chaos in major financial markets.
The collapse of one fund, Long-Term Capital Management, in 1998 prompted U.S. officials to devise a rescue plan to
contain the damage, though losses incurred last year by another fund, Amaranth Advisors, did not create a systemic
crisis.
Americans tend to favor voluntary codes of conduct for new industries, a stance that generally finds favor in Britain. In
continental Europe, attitudes tend to run more toward regulation, but there have been noteworthy exceptions recently.
Jean-Claude Trichet, president of the European Central Bank, spoke out at the Group of 7 meeting for "spontaneous
standards and codes that would be voluntary, elaborated by the industry itself."
At times the ministers appeared to be exhorting the hedge fund industry — still a relative newcomer to finance — to
recognize its own interests and police itself.
The German finance minister, Peer Steinbrück, warned that the repetition of a crisis like the one involving Long- Term
Capital Management could provoke the outside regulation that funds wanted to avoid.
"They would have to reckon with a political reaction," Steinbrück said.
Germany has seen its share of turbulence related to hedge funds. In 2005, two funds that opposed a bid by Deutsche
Börse to take over the London Stock Exchange engineered the downfall of the chairman and chief executive of Deutsche
Börse, which is based in Frankfurt.
To follow through on their concerns about hedge funds, the ministers directed a committee known as the Financial
Stability Forum to update a report it wrote on the subject in 2000.
Paulson said that "over the last two days, we discussed ways to keep the global economy growing in a balanced way,"
including "pressing for greater exchange-rate flexibility in China."
The ministers' statement said: "In emerging economies with large and growing current account surpluses, especially
China, it is desirable that their effective exchange rates move so that necessary adjustments will occur."
China's tight control of its currency, the yuan, and its huge trade surpluses have raised concerns in the West. At its last
meeting, the G-7 urged China to give the yuan greater freedom to respond to market movements.
The G-7 finance officials also said that in addition to Japan, the world's major developed economies were showing solid
growth, adding that energy efficiency and diversification — particularly renewable forms — remained a priority.
The G-7 said activity in the U.S. economy was solid, though slowing to a more sustainable growth level. Growth in
Canada and Britain is strong and balanced, it said, the upswing in the euro area is acquiring a larger and larger base, and
Japan's recovery is on track and will continue. $@(AP, Reuters)