- The Washington Times - Wednesday, April 16, 2008


Managers of hedge funds would be required to improve the operating procedures of the giant pools of capital in such areas as transparency and risk management under new proposals offered yesterday.

Two advisory groups assembled by the Bush administration proposed new “best practices” for the hedge-fund industry, but a leading critic attacked the effort as falling far short of the mandatory government regulations that are needed.

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 M. Paulson Jr. 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.”

However, Richard Blumenthal, attorney general of Connecticut, the home for many hedge funds, said the voluntary guidelines were a “virtual farce” that would do little to halt abuses in an industry that has seen explosive growth with assets now close to $2 trillion in an estimated 8,000 funds.

“Hedge funds have become too big and too important to remain outside the rules,” Mr. Blumenthal said. “Instead of voluntary guidelines, the federal government should set specific, common-sense rules and provide for federal and state enforcement.”

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 reached record levels.

Hedge funds, which operate with little government supervision, cater to institutional investors and very wealthy people. 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 Mr. 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 yesterday, Mr. 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.

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.

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