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Grassley Asks Treasury for Ways to Spur Hedge Fund Transparency

Date: Monday, October 16, 2006
Author: Alison Fitzgerald, Bloomberg.com

October 16 (Bloomberg) -- Senate Finance Committee Chairman Charles Grassley told Treasury Secretary Henry Paulson that hedge funds pose too much risk to the U.S. pension system, and asked him to find ways to boost transparency in the funds.

``Tens of millions of Americans are exposed to the risk of hedge funds through intermediaries such as pension funds, endowments and other investment pools,'' Grassley said in a letter to Paulson today. ``The potential for significant losses at our nation's pension funds due to hedge fund investments could put the retirement security of American workers in jeopardy.''

Grassley's letter was spurred by the collapse of Amaranth Advisors LLC, a Greenwich, Connecticut-based hedge fund that lost $6.5 billion last month after losing bets on natural gas trades. It was the most costly collapse ever for investors in hedge funds, private pools of capital that allow managers to participate substantially in the gains of the money invested.

Grassley said his staff was unable to get information about the exposure of major pension funds to Amaranth or other energy- focused funds. He said his staff was unable even to identify which funds were the largest traders in energy.

``I am deeply concerned about the lack of publicly available information regarding hedge funds,'' Grassley, a Republican from Iowa, wrote in the letter, which he also sent to other members of the administration and lawmakers who chair committees concerned with investments and pensions.

Seeking Suggestions

He asked for suggestions on how Congress can mandate more transparency for hedge funds.

Treasury spokeswoman Brookly McLaughlin said the department is reviewing the letter.

Emil Henry, Treasury's assistant secretary for financial institutions, is leading an inquiry into the need for further hedge fund regulation. Henry has held meetings with other government agencies, representatives of the financial services industry including hedge funds and investment banks.

The department's new undersecretary for domestic finance, Robert Steel, said he wants the department to ``pause and reevaluate'' whether hedge funds need more oversight.

``Hedge funds are sophisticated instruments,'' Steel said in his confirmation hearing on Sept. 21. ``They should be for people who can live with the illiquidity, the non-transparency, and the risk.''

His predecessor, Randal Quarles, said in March that Treasury was studying the growth of derivatives and hedge funds to see if they change the ``overall level or nature of risk'' in markets and financial institutions.

To contact the reporter on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net @bloomberg.net.