U.S. Aims to Limit Funds' Risk

Russell Read of Calpers will lead an investors' committee charged with reducing hedge funds' risks. (Mark Wilson - Getty Images)

The Treasury Department yesterday assembled two blue-ribbon groups that will explore ways to minimize the risks associated with hedge funds, the latest step to promote accountability in the $1 trillion sector without restricting its growth.

Hedge funds are private investment pools designed for wealthy individuals and institutions, but in recent years they have increasingly attracted a broader array of clients, including state retirement and pension plans. Because hedge funds are subject to far less oversight than many other investments, lawmakers have questioned whether they could mask fraud and pose broader risks to the economy.

Treasury Secretary Henry M. Paulson Jr. and Deputy Undersecretary Robert K. Steel, both former Goldman Sachs executives, have rejected the need for new regulations. Instead, the Paulson-led President's Working Group on Financial Markets issued a report in February encouraging the funds' trading partners and Wall Street backers to exercise their muscle and act as a check on the funds.

Yesterday, government officials unveiled two panels composed of hedge fund managers and prominent investors, both charged with developing a voluntary set of best practices regarding risk management and information disclosure. Each of the committees will issue written guidance by the end of the year, Steel told reporters at a news conference in Washington.

Many hedge funds have reported heavy losses this year based on bad bets they made in the housing sector. Asked whether the Treasury had moved too slowly, Steel said yesterday that government discussions over how to handle hedge funds began last fall and asserted that now is a "perfect time" to emphasize the participation of fund managers and investors in the oversight regime.

Eric Mindich of Eton Park Capital Management will lead the asset managers' committee, which also includes Kynikos Associates chief James S. Chanos, who issued early warnings about problems at Enron six years ago.

Of particular interest, according to the committee's mission statement, are ways that hedge fund managers put a price tag on their investments, which can be difficult to evaluate. The Securities and Exchange Commission recently launched an effort to scrutinize how the funds and other companies value subprime real estate holdings to ensure they are not downplaying risks or losses.

The investors' committee will be chaired by Russell Read, the chief investment officer at Calpers, the California Public Employees' Retirement System. That panel includes representatives from the AFL-CIO, the Washington State Investment Board and the Princeton University Investment Co.

Read said a critical issue for his committee will be sharing techniques to vet asset managers and their strategies with small investors who may have fewer resources and less expertise.