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Last Updated: Friday, 23 February 2007, 11:05 GMT
US rejects hedge funds controls
US Treasury Secretary Henry Paulson
US Treasury Secretary Henry Paulson backs a light-touch hedge fund regime
The US government has rejected tighter controls over the hedge fund industry.

Treasury Secretary Henry Paulson said increased vigilance rather than laws were the best guarantee of stable hedge fund performance.

Mr Paulson chairs the President's Working Group, which reviews risk in the financial markets.

His report has drawn criticism from politicians concerned at a lack of formal protection for investors in the 9,000 US hedge funds.

US hedge funds are estimated to control $1.5 trillion (766bn) of assets.

State of apprehension

Connecticut Attorney General Richard Blumenthal attacked the Working Group's report as lacking substance.

Many hedge funds are based in Connecticut and Mr Blumenthal, a Democrat, has spoken of introducing tighter regulations in the state.

The industry is no longer the exclusive preserve of the super-wealthy and international concern has grown over the level of risk investors are exposed to by the lightly-regulated investment schemes.

The G8 group of leading industrialised nations will launch a study into the economic implications of hedge fund activity when Germany takes over its presidency this year.

SEC chairman Christopher Cox
SEC chairman Christopher Cox has fought for hedge fund regulations

Last year, Amaranth Advisors, a US hedge fund, lost $6bn after placing a huge bet on the future of gas prices.

The fallout from the Amaranth debacle damaged investment and pension funds which lost millions of dollars and focused attention on the lack of control over hedge fund managers.

One proposal emanating from the Securities and Exchange Commission (SEC) in Washington is to raise the limit on the assets an individual must possess to qualify for hedge fund membership.

Currently US hedge fund investors must be worth $1m but the SEC has spoken of raising this to $2.5m.

SEC chairman Christopher Cox told the Senate Banking Committee that hedge fund risk was a matter of serious concern in July 2006.

He was speaking after a federal court rejected SEC rules that would have forced hedge funds to open their books to regulators.

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