Europenan report to let hedge funds off easy, FT says


Hedge Fund Report to Split Views

By Ralph Atkins and Mark Schieritz
Financial Times, London
Wednesday, April 11, 2007

An international task force charged with investigating the fast-growing hedge fund industry will stop short of proposing concrete steps to beef up its policing by financial regulators.

The draft conclusions of a report due to be presented next month to finance ministers and central bank governors from leading industrial nations are likely to disappoint continental European governments worried about risks to financial stability posed by the sector. The report highlights the complexity of the possible risks involved, according to information obtained by the Financial Times.

Details of its draft conclusions have emerged as hedge fund representatives prepare to meet deputy finance ministers from G7 advanced industrial countries this weekend to discuss ways of increasing transparency in the sector.

In February, G7 finance ministers meeting in Essen, Germany, asked for an updated report on hedge funds from the Financial Stability Forum, an international grouping of regulators and central bankers chaired by Mario Draghi, Italy's central bank governor and a former vice-chairman of Goldman Sachs International.

The initiative has helped the Berlin government drive forward the debate on how to encourage transparency in the sector without calling into question its economic benefits. Britain and the US remain wary about creating any additional regulatory hurdles. Germany holds the G7 presidency.

The draft version of the Financial Stability Forum's report circulating among finance ministries argues that supervisors have a role in setting expectations regarding risk management practices by banks and financial institutions dealing with hedge funds. But it does not mention ideas floated in Germany for a global database of hedge fund investments, a code of conduct for the sector or enhanced public scrutiny by rating agencies.

Instead, the report cites steps under way by supervisory organisations to improve the measurement of possible exposure to risks and to strengthen financial market infrastructure.

Nevertheless, the Berlin government is likely to believe its case for pressing ahead with its hedge fund initiative has been strengthened by the report's warnings on the risks involved with increasingly complicated hedge fund activities. The report notes how these activities account for a significant part of the turnover of many financial markets.

The report also says its rapid growth has so far coincided with a beneficial global macroeconomic environment. However, increased product and trading complexity has created additional difficulties in measuring risk, and the report argues that financial markets are showing signs of complacency about the possible risks, which may have been underpriced.

The debate on hedge funds initiated by Peer Steinbruck, Germany's finance minister, is expected to culminate ahead of this year's G8 summit in Heiligendamm, on Germany's Baltic Sea coast.

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at GATA is grateful for financial contributions, which are federally tax-deductible in the United States.