More Hedge Fund Scrutiny Urged

In calling for more scrutiny of--but not direct control over--so-called hedge funds, federal regulators are taking a measured and market-oriented approach to problems that erupted last year in the $300-billion industry, experts said Thursday.

The steps proposed by the Clinton administration Thursday seem unlikely to drive more of the often-shadowy funds offshore or spark strong opposition from Wall Street, these observers said.

“I’m impressed. It’s an incrementalist approach that might do some good,” said Henry T.C. Hu, a professor of financial law at the University of Texas.

Hedge funds are private, unregulated investment pools that cater to institutions and wealthy individuals. Known for their secrecy--and fast money shifts--hedge funds burst into the news last September when a large fund, Long-Term Capital Management, nearly collapsed after borrowing excessively to make market bets.

The fund was bailed out by major banks after its near-demise threatened havoc in global markets.

In its report Thursday on Long-Term Capital, a group headed by Treasury Secretary Robert E. Rubin and Federal Reserve Chairman Alan Greenspan recommended putting more pressure on the brokerages and banks that lend money to hedge funds rather than on the funds themselves.

The panel asked Congress to give the Securities and Exchange Commission and the Commodity Futures Trading Commission more powers to examine trading and risk-management practices at the firms they regulate.

The group also proposed stiffening banks’ and brokers’ capital requirements for some types of transactions. Because banks and brokers lend money to hedge funds through sales of “derivative” securities and other deals, the intention is to indirectly restrain the hedge funds from taking on the kinds of extreme risk that nearly toppled Long-Term Capital.

The regulators also asked that hedge funds be required to make quarterly reports of their trading and borrowing positions.

George P. Van, at research firm Van Hedge Fund Advisors, noted that while Long-Term Capital’s borrowings reached 40 times its capital, most hedge funds have “leverage ratios” of only 1 to 1.

While the industry may still bristle at any regulatory intrusion, the proposals are “fairly benign so far,” Van said. “Nobody likes going through the metal detector, but if it stops one bomb, it’s worth it.”