EU finance ministers agree to keep an eye on hedge funds but set no new rules

Date: Wednesday, May 9, 2007
Author: International Herald Tribune

BRUSSELS, Belgium: EU finance ministers agreed Tuesday to keep an eye on hedge funds, steering clear so far of setting new rules for the high-risk, high-return investments — although Germany said it will keep seeking support for a global code of conduct.

Germany, which currently leads talks between EU nations and the G-7 group of industrialized countries, said it will raise the issue again at talks it will host in the coming weeks.

German Finance Minister Peer Steinbrueck said he believed there was a good chance he could get agreement on a voluntary code by the end of the year.

"We all agree that the regulatory approach is the wrong one. So we're taking the indirect approach," he told reporters.

In a joint statement, EU ministers warned creditors, investors and authorities to remain vigilant and push for any necessary changes to allow them assess the potential risks that hedge funds could pose to them and to the global financial system.

They said that "indirect supervision" — where regulators and investors monitor what kind of risk banks and pension funds have taken on — has so far protected the sector against major shocks.

"Creditors and investors should also examine whether the current level of transparency of hedge funds' activities is appropriate," they said. "Supervisory authorities should monitor developments and cooperate among themselves."

But the ministers have not endorsed more rules for funds, saying it was important for supervisors to better understand how hedge funds work and how they affect markets.

There was some praise for hedge funds, saying they had "contributed significantly to fostering the efficiency of the financial system," but a warning too of the potential risks in the way funds operate and their affect on the financial system.

Steinbrueck said hedge fund managers were starting to realize those problems themselves and some would sign up to a code, but again stressed his view that hedge funds need watching.

"Given the leverage effect of hedge funds, couldn't there be risks for the financial markets on a global basis?" he asked.

The man who could draft EU rules to regulate hedge funds — EU Financial Services Commissioner Charlie McCreevy — said he sees no need to do so because the industry contains its own checks and balances and is so far working well.

"If the industry wants to go with having a voluntary code of conduct then that's a matter for them," he said. "At this stage I don't see a need for a (European) Community initiative in this area, that the case has not yet been proven."

Ministers have asked him to assess if new rules would be a good idea, saying it might be important to protect unwary investors.

The high-risk, largely unregulated and secretive investment pools have traditionally been the investment domain of the wealthy but have become popular with pension funds, life insurance companies and small investors looking for high returns — even though some may not be prepared to deal with the risks.

The sudden collapse of U.S.-based hedge fund Amaranth Advisors last September after losing more than US$6 billion (€4.7 billion) on bad energy trades has spurred regulators on both sides of the Atlantic to look into the booming financial sector.

Hedge funds became a political hot potato in Germany in 2005 when a senior Social Democrat politician called for tougher controls, describing them as "locusts" after hedge fund pressure scotched Deutsche Boerse AG's bid for the London Stock Exchange PLC and forced out the German stock exchange's chief executive.

The finance ministers' talks came a day after the EU raised its growth forecasts for the 13-nation euro currency zone to 2.6 percent this year and to 2.9 percent for all 27 countries of the EU expand by 2.9 percent.