Government Pledges Vigilance Over Hedge Funds, Says New Regulations Not Needed

The Bush administration and top financial regulators pledged increased vigilance over hedge funds Thursday but stopped short of proposing any new regulations to control the trillion-dollar industry.

Instead, the President's Working Group composed of administration officials and various market regulators put forward a set of guidelines they said would enhance information about the largely secretive investment pools.

"These guidelines should serve as a foundation to enhance vigilance and market discipline further, which will strengthen investor protection and guard against systemic risk," Treasury Secretary Henry M. Paulson, the head of the working group, said in a statement.

The working group, which was formed after the stock market crash of 1987, is composed of the Treasury secretary and the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Paulson said the group believed that the government's policies toward hedge funds should be governed by a consistent set of principles "that set out a uniform approach to specific policy objectives."

The guidelines stressed the need to boost information so that market participants would have an accurate and timely assessment on which to base investment decisions.

Paulson said the working group would continue to monitor developments in the hedge fund market with these principles in mind.

Unlike mutual funds, which generally hold stocks and bonds, hedge funds can invest in anything from commodities to real estate. Some funds even buy whole companies, while others buy and sell stocks like day traders — but with billions of dollars at stake.

One of the biggest hedge fund collapses to date came last September, when Amaranth Advisors lost a stunning $6 billion because of bad bets on natural gas prices. California's San Diego County lost an estimated $85 million from an Amaranth investment by its employee pension fund.

U.S. hedge funds, now numbering more than 9,000 with assets estimated to exceed $1 trillion, traditionally catered to the rich, as well as pension funds and university endowments, but are increasingly luring less wealthy investors.

The funds operate with minimal government supervision. Since 2001, the SEC has brought more than 60 cases charging hedge fund managers with defrauding investors of more than $1 billion.

Earlier this month, finance ministers and central bank presidents from the Group of Seven wealthy industrialized nations called for more vigilance on the rising power of hedge funds and pledged follow-up efforts to assess the impact of the funds on global financial markets.

Germany, which will host this year's annual economic summit of President Bush and other world leaders, has made dealing with hedge funds a priority. The G-7 consists of the United States, Japan, Germany, France, Britain, Italy and Canada.

In December, the Securities and Exchange Commission proposed to raise the minimum financial requirements for individuals wanting to invest in hedge funds.

Under current rules for investing in hedge funds, in effect since 1982, an individual must have at least $1 million in net worth or annual income of $200,000 to qualify. The new SEC proposal would add to that a requirement that an individual's assets include at least $2.5 million in investments, excluding a personal residence.

Only about 1.3 percent of U.S. households would qualify as eligible under the proposal, according to SEC economists.

The SEC also proposed a new antifraud rule for hedge funds, making it clear that the agency will pursue fund managers for improper activity.

The agency was thwarted by a federal appeals court in the spring of 2006 in its effort to bring hedge funds under its supervision; the narrower changes being put forward are not expected to be open to legal challenge.