Hedge funds need greater transparency, groups suggest

Hedge funds should increase their transparency and improve their risk management, two advisory groups assembled by the Bush administration said Tuesday.

Treasury Secretary Henry M. Paulson Jr. said the voluntary guidelines proposed by the panels would send “a strong message that heightened vigilance is necessary and appropriate and that all stakeholders have an important role to play.”

But Richard Blumenthal, attorney general of Connecticut, where many hedge funds are based, called the recommendations a “virtual farce” that would do little to halt abuses. He called for government regulation of the industry, which manages about $2 trillion of assets in an estimated 8,000 funds

“Hedge funds have become too big and too important to remain outside the rules,” Blumenthal said in a statement.

Sen. Charles E. Schumer (D-N.Y.) said Congress was just beginning to examine what needed to be done in the wake of the current credit crisis but “in the interim these best practices should strengthen the hedge fund industry and provide investors and regulators with better information.”

One set of the recommendations released Tuesday was prepared by hedge fund managers and the other by hedge fund investors.

The industry, which operates with little government supervision, cater to institutional investors and very wealthy individuals. But millions of ordinary people have also become indirect investors in the funds through their pension plans.

In early 2007, a presidential working group headed by Paulson rejected the idea that the funds needed increased regulation, calling instead for improved voluntary standards.

The investor advisory panel was headed by Russell Read, the chief investment officer of the California Public Employees’ Retirement System, the country’s largest pension fund. The panel of hedge fund managers was led by Eric Mindich, head of Eton Park Capital Management.

Read told reporters at a briefing that Amaranth Advisors, which lost $6 billion in 2006 because of bad bets on natural gas prices, was the “poster child” for what the advisory groups were trying to guard against by proposing a set of best practices.

“I think this represents a coming of age for the hedge fund industry,” Read said.