US rejects tight control of hedge funds

US treasury secretary Henry Paulson has called for “increased vigilance” over the activities of hedge funds but has eschewed regulation. In an article published by www.hedgefundsreview.com, he said hedge funds should increase disclosure and strengthen risk management.

His remarks follow the release of reports from two committees chaired by Paulson and meeting under the auspices of the US president's working group on financial markets (PWG).

“We want the world's highest investor protection standards. We want to guard against systemic risk and keep the US the most competitive financial marketplace in the world. As these committees were formed, their chairmen and the PWG believed that markets benefit when experienced and respected participants develop best practices and new accountability standards,” said Paulson. “These are important issues, and these recommendations represent tangible steps towards our goals.”

The asset managers' committee, chaired by Eric Mindich, CEO of Eton Park Capital Management, recommended a series of rules for comprehensive best practices for hedge funds in all aspects of their business, including disclosure, transparency, valuation of assets, risk management, business operations, compliance and conflicts of interest. The committee included representatives from a diverse group of hedge fund managers, representing different strategies.

"This report calls on hedge funds to implement these rules and go beyond them by disclosing, on a quarterly basis, the portion of their assets and the performance attributable to each of the three levels," said Mindich. "This will go a long way to help clarify the types of assets and risks in the fund."

The investors committee, headed by Russell Read, chief investment officer of California's $240.9bn pension fund CalPERS (California public employees' retirement system), recommended guides for individuals responsible for evaluating hedge funds as part of an investment portfolio. The committee included representatives from labour organisations, endowments, foundations, corporate and public pension funds and investment consultants.

Read said the intent behind the proposals was to encourage hedge funds to offer "adequate disclosure" so that pension funds and other fiduciaries would be able to assess whether they are an appropriate investment vehicle.

The best practices were designed to be consistent with the recommendations issued by the Hedge Funds Working Group in the UK . Its successor organisation, the Hedge Funds Standards Board issued guidelines in February, and is urging fund managers to sign up to a voluntary set of best practices relating to valuation, disclosure, risk management and governance. So far only 14 hedge funds have committed to the guidelines.

According to Bradley Ziff, head of the hedge funds advisory practice at consultant Oliver Wyman, and the board's liaison to PWG, the PWG's recommendations are a significant enhancement in looking at approaches to risk management, transparency, disclosure and leverage in the hedge fund industry.

In a joint statement, the Alternative Investment Management Association and the Managed Funds Association called the guidance "comprehensive and substantive" and said they looked forward to submitting formal comments.