U.S. seeks hedge fund vigilance
Increased vigilance, not new government rules, is the best way to handle risks in the trillion-dollar hedge fund industry, the Bush administration and regulators said Thursday.
Officials put forward guidelines they said should be followed by fund investors and institutions such as banks and brokerage houses that do business with the funds.
The guidelines, said Treasury Secretary Henry M. Paulson Jr., “should serve as a foundation to enhance vigilance and market discipline further, which will strengthen investor protection and guard against systemic risk.”
Business groups supported the hands-off approach. Critics said the growing size of hedge funds -- they top $1 trillion in the United States -- and some spectacular failures such as last fall’s collapse of Amaranth Advisors showed the need for greater controls.
Hedge funds can invest in anything from commodities to real estate. By comparison, mutual funds generally hold stocks and bonds. Some hedge funds even buy entire companies; others buy and sell stocks like day traders, but with billions of dollars at stake.
U.S. hedge funds number more than 9,000. They traditionally have catered to the rich, as well as pension funds and university endowments, but increasingly are luring less wealthy investors. The funds operate with minimal government supervision.
The recommendations came from the President’s Working Group, formed after the 1987 stock market crash. Paulson leads the group, which includes the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The guidelines stress the need for more information so investment decisions are based on accurate and timely assessments.
Last September, Amaranth Advisors lost a stunning $6 billion because of bad bets on natural gas prices. San Diego County lost an estimated $85 million from an Amaranth investment by its employee pension fund.
In 1998, the collapse of Long-Term Capital Management rocked Wall Street as investors struggled to cope with the Asian financial crisis.
Richard Blumenthal, attorney general in Connecticut, home to many hedge funds, said the new guidelines did not adequately protect investors.
“These vague recommendations lack substance and specifics, making them unenforceable. In a perfect world, everyone would already follow these guidelines, but in the real world we need real protections,” he said in a statement.
The House Financial Services Committee plans to hold a hearing on hedge funds in the spring.
