Bernanke Backs Fund Regulation System

Federal Reserve chairman Ben Bernanke, gestures as he answers students' questions at New York University's law school in New York, Wednesday, April 11, 2007. The current market-based system is the best way to regulate the trillion-dollar hedge fund industry although improvements can be made, Federal Reserve Chairman Ben Bernanke said Wednesday. (AP Photo/Kathy Willens) (Kathy Willens - AP)

WASHINGTON -- The current market-based system is the best way to regulate the trillion-dollar hedge fund industry although improvements can be made, Federal Reserve Chairman Ben Bernanke said Wednesday.

Bernanke, speaking to a conference on global economics in New York City, said the current system is superior to increased government regulation. That view is at odds with critics who say large failures in recent years highlight the need for greater supervision.

"Thus far, the market-based approach to the regulation of hedge funds seems to have worked well, although many improvements can be made," Bernanke said in remarks to a global economic conference sponsored by the New York University law school.

Bernanke noted that the collapse of a Connecticut hedge fund, Long-Term Capital Management, came during a period of severe financial stress in 1998.

He said Congress correctly rejected suggestions after that failure to impose greater government regulations. He said in the last 10 years the ways investors have to manage risks "have become considerably more sophisticated."

Bernanke did not mention in his speech last fall's collapse of another hedge fund, Amaranth Advisors, which critics contend shows the need for greater government oversight.

Instead, Bernanke said he supported the conclusions reached by the President's Working Group in February, which stated that what the hedge fund industry needed was increased vigilance on the part of investors rather than new government rules.

"To be clear, market discipline does not prevent hedge funds from taking risks, suffering loses or even failing _ nor should it," Bernanke said.

"If hedge funds did not take risks, their social benefits _ the provision of market liquidity, improved risk-sharing and support for financial and economic innovation, among others _ would largely disappear," he said.

During a question-and-answer session following the speech, Bernanke echoed calls by Treasury Secretary Henry Paulson for China to allow greater flexibility in its currency, something that manufacturers say would help narrow the huge trade gap between the two nations.

"It would be very much in their interest to increase the flexibility of their exchange rate," Bernanke said in response to a question. "It would allow them to have an independent monetary policy which they're having some difficulty with right now."

Bernanke is a member of the President's Working Group, which was formed in the wake of the 1987 stock market crash. He has previously stated worries that the government could over-regulate hedge funds.