Two advisory groups assembled by the Bush administration proposed new "best practices" today for the hedge fund industry, designed to improve and clarify the operations of the giant pools of capital.
The guidelines call on hedge fund managers to improve their operating procedures in such areas as disclosure, valuation of their assets, risk management and guarding against conflicts of interest.
One set of the recommendations was prepared by hedge fund managers and the other was put together by investors who use the funds.
Treasury Secretary Henry Paulson said the recommendations would send "a strong message that heightened vigilance is necessary and appropriate and that all stakeholders have an important role to play."
The release of the guidelines comes at a time when a severe credit crisis has roiled financial markets with many large banks and investment houses being forced to declare billions of dollars in losses. Hedge funds have been caught up in the turmoil as investors have grown worried about the solvency of funds that invested heavily in securities backed by subprime mortgages, where delinquencies have hit record levels.
Hedge funds have grown explosively in recent years with estimates that there are now more than 8,000 funds with close to $2 trillion in assets.
They currently operate with very little government supervision, catering to institutional investors and very wealthy individuals. However, millions of ordinary people have also become unwitting 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 and said what was needed was improved voluntary standards for both fund managers and investors.
In unveiling the recommendations of the advisory groups on Tuesday, Paulson said the administration was not endorsing the status quo but rather pushing for improvements that would keep U.S. financial markets competitive in a global economy.
"We want the world's highest investor protection standards, we want to guard against systemic risk and keep the United States the most competitive financial marketplace in the world," Paulson told reporters at a Treasury news conference.
Sen. Charles Schumer, D-N.Y., a key voice on financial matters in the Senate, said that Congress was just beginning to examine what needs to be done in the wake of the severe credit crisis but "in the interim these best practices should strengthen the hedge fund industry and provide investors and regulators with better information."
The credit crisis claimed its biggest victim last month with the near-collapse of Bear Stearns, the country's fifth largest investment bank, which was taken over by JP Morgan Chase Co. in a deal in which the Federal Reserve provided a $30 billion loan.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said in an interview with The Associated Press on Tuesday, that he expected Congress &
not this year &
but in the future to revamp financial regulations to better keep pace with financial innovations.
In particular, he said, investment houses, hedge funds and other so-called nonbanks have been innovative, taken risks and are highly leveraged but operate under "too few constraints." Some "regulatory replacements" need to be found, said Frank, who is putting together his own regulatory effort in this area.
One set of recommendations unveiled Tuesday provides guidelines on how investors of hedge funds should operate. It was drawn up by an investors' group headed by Russell Read, the chief investment officer of the California Public Employees' Retirement System (CalPERS), the largest pension fund in the United States.
The other set of recommendations designed to serve as guidelines for the managers of the hedge funds was draw up by an advisory panel headed by Eric Mindich, the head of Eton Park Capital Management, a large hedge fund.
Mindich said in an interview with The AP that the effort was intended to "raise the bar" for the industry. He said the proposals could be modified based on comments received during an upcoming 60-day comment period.
In a spectacular hedge fund failure, Amaranth Advisors lost $6 billion in the fall of 2006 because of bad bets on natural gas prices. Read told reporters at a briefing that Amaranth 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.
Associated Press writers Marcy Gordon and Jeannine Aversa contributed to this report.
New 'best practices' urged for giant hedge funds