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ESSEN, Germany: Finance ministers from the world’s leading economies put the $1.4 trillion hedge fund industry firmly on the international policy agenda over the weekend, saying that they would scrutinize the sector closely with an eye toward encouraging more self-regulation.

Representatives from the Group of 7 countries, who met in the industrial center of the host country, Germany, issued a statement saying the practices of hedge funds, which have drawn growing concern among financial policy makers over the past few years, had “become more complex and challenging” in light of the industry’s prominence and volatility.

“Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant,” the ministers said. “We therefore agreed to further pursue the issue.”

Hedge funds, which manage vast pools of capital and operate largely outside regulatory scrutiny, have grown to become some of the largest and most important players in markets around the world, particularly on Wall Street and in London. Fortress Investment Group, the first hedge fund in the United States to go public, saw its shares rise 67.6 percent Friday, their first day of trading.

At the meeting Saturday, even the U.S. Treasury secretary, Henry Paulson Jr. whose former firm, Goldman Sachs, profits immensely from its relationship with hedge funds said hedge funds needed more attention from policy makers.

“I can’t imagine we could be doing our jobs, those of us responsible for financial regulation, without talking about this topic,” Paulson said.

Policy makers worry that a major hedge fund failure could endanger the stability of the funds’ lenders, which tend to be the biggest international investment banks, leading to chaos in major financial markets.

The collapse of one fund, Long-Term Capital Management, in 1998 prompted U.S. officials to devise a rescue plan to contain the damage, though losses incurred last year by another fund, Amaranth Advisors, did not create a systemic crisis.

Americans tend to favor voluntary codes of conduct for new industries, a stance that generally finds favor in Britain. In continental Europe, attitudes tend to run more toward regulation, but there have been noteworthy exceptions recently. Jean-Claude Trichet, president of the European Central Bank, spoke out at the Group of 7 meeting for “spontaneous standards and codes that would be voluntary, elaborated by the industry itself.”

At times the ministers appeared to be exhorting the hedge fund industry still a relative newcomer to finance to recognize its own interests and police itself.

The German finance minister, Peer Steinbrьck, warned that the repetition of a crisis like the one involving Long- Term Capital Management could provoke the outside regulation that funds wanted to avoid.

“They would have to reckon with a political reaction,” Steinbrьck said.

Germany has seen its share of turbulence related to hedge funds. In 2005, two funds that opposed a bid by Deutsche Bцrse to take over the London Stock Exchange engineered the downfall of the chairman and chief executive of Deutsche Bцrse, which is based in Frankfurt.

To follow through on their concerns about hedge funds, the ministers directed a committee known as the Financial Stability Forum to update a report it wrote on the subject in 2000.

Paulson said that “over the last two days, we discussed ways to keep the global economy growing in a balanced way,” including “pressing for greater exchange-rate flexibility in China.”

The ministers’ statement said: “In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur.”

China’s tight control of its currency, the yuan, and its huge trade surpluses have raised concerns in the West. At its last meeting, the G-7 urged China to give the yuan greater freedom to respond to market movements.

The G-7 finance officials also said that in addition to Japan, the world’s major developed economies were showing solid growth, adding that energy efficiency and diversification particularly renewable forms remained a priority.

The G-7 said activity in the U.S. economy was solid, though slowing to a more sustainable growth level. Growth in Canada and Britain is strong and balanced, it said, the upswing in the euro area is acquiring a larger and larger base, and Japan’s recovery is on track and will continue. $@(AP, Reuters)

This entry was posted on Monday, February 12th, 2007 at 12:33 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

G-7 Recommends Vigilance on Hedge Funds G-7 Recommends Vigilance on Hedge Funds, Foreign Currency Fluctuation, Dwindling Energy Supply By MATT MOORE The Associated Press

ESSEN, Germany - The world’s major developed economies show solid growth, but foreign exchange fluctuations, the rising power of hedge funds and dwindling energy supplies are a concern, G-7 finance officials said Saturday.

The finance ministers and central bankers also lauded China’s commitment to “rebalance growth,” but called for a move in its effective foreign exchange rate.

China’s tight control of its currency and trade surpluses have also raised concerns in the West. At its last meeting, the G-7 urged China to let the yuan respond more flexibly to market movements. This more explicit reference to movement in the exchange rate was a change.

“Over the last two days, we discussed ways to keep the global economy growing in a balanced way, including stimulating domestic demand in Japan and Europe and pressing for greater exchange-rate flexibility in China,” said U.S. Treasury Secretary Henry Paulson.

When the G-7 formed, comprising Britain, Canada, France, Germany, Italy, Japan, and the United States, China was an insular, closed communist state. In the three decades since, however, China’s growth has exploded as it embraces elements of capitalism.

China has amassed more than $1 trillion in foreign currency reserves as it buys dollars to control the value of the yuan a practice G-7 finance ministers have criticized in the past.

The finance ministers and central bankers called for more vigilance toward hedge funds but maintaining a conciliatory approach, and said energy efficiency and diversification particularly renewable forms remains a priority.

Germany has made dealing with hedge funds a priority for its EU and G-8 presidencies this year given their rising influence over companies. Finance Minister Peer Steinbrueck has said the country wants G-7 nations and EU countries to try to pre-empt any risks that speculative hedge funds may pose to the global financial system.

Hedge funds 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.

The statement said the group will talk with the private sector and hedge fund operators and would ask the Financial Stability Forum, a gathering of financial ministers, regulators, institutions and others, to reassess the impact of hedge funds on global markets.

“Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant,” the G-7 officials said.

The G-7 members were hopeful the Doha round of free trade talks would resume.

“We remain committed to resisting protectionist sentiment and fully support the relaunch of the Doha trade negotiations,” they said in the statement.

Looking at energy concerns, the G-7 members said that global inflationary pressures have lessened, in part because of lower energy prices, but said they would continue to keep an eye on consumer prices.

They also said that finding, and using, more energy efficient methods, along with diversifying sources, had become an increasing concern.

“We agree that market based policy measures, which could include taxes and emission trading, should be effectively designed to meet specific conditions in each country,” the group said. “At the same time, we remain committed to a transparent and forward looking dialogue with energy-producing countries.”

This entry was posted on Saturday, February 10th, 2007 at 7:34 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.