Hedge Funds Need More Oversight, Transparency, Treasury Panels Say
Wednesday, April 16, 2008
Two committees appointed by the Treasury Department called yesterday for greater accountability within the secretive world of hedge funds and pressed fund managers to detail their investment activities, saying such moves would help the troubled financial markets.
The two panels included senior executives of large hedge funds and major institutional investors such as pension funds. Under their proposals, hedge funds would set up independent bodies to oversee how fund managers are pricing hard-to-value financial investments and examine whether they are facing conflicts of interest.
The committees' report takes aim at complex financial instruments, which were at the core of the credit meltdown. Many hedge funds and investment firms were overly optimistic about the value of mortgage-related securities and then suffered massive losses when such assets began to plummet in price last year.
Investors lost confidence in all kinds of debt securities and pulled out of the credit markets, virtually shutting them down. Several major hedge funds collapsed, further destabilizing the financial system.
Treasury Secretary Henry M. Paulson Jr. said the committees' report "sends a strong message that heightened vigilance is necessary."
Speaking to reporters at the Treasury, he added, "Today's release reinforces our belief that a combination of robust market discipline and regulatory policies best protect investors and mitigate systemic risk."
But the recommendations, keeping with a long-standing position of the Bush administration, did not seek regulatory oversight for hedge funds, which are large pools of private money that can be used for a wide range of investments.
Members of the panels said that the proposals were voluntary and acknowledged that they did not know how much it would cost to implement them.
The two committees had separate but related tasks. The first, comprising managers who oversee 10 of the nation's largest hedge funds, developed a set of best practices for their industry. The other provided guidance for investors.
Eric Mindich, who chaired the first panel, is chief executive of Eton Park Capital Management, a $12 billion hedge fund. He said the 10 committee members committed themselves to the reports' proposals. He said he hoped other hedge funds would follow their example.
"We agreed to do this not because anyone put a gun to our head but because we thought these recommendations are right and represented a step forward for the industry," he said in an interview.
Hedge fund managers must take more responsibility for their role in the markets because they have become such a significant force on Wall Street, Mindich added. Hedge funds manage about $2 trillion in assets and represent the majority of trading on major stock exchanges, he said.
Russell Read, chief investment officer of the California Public Employees' Retirement System, the nation's largest pension fund, chaired the second committee, which developed a guide to help investors determine whether they should invest in hedge funds and, if so, which ones. The panel also recommended that investors develop their own methods to evaluate the risks of investments made by hedge funds.
In an interview, Read said it would have been "very difficult to implement these proposals in a regulatory framework" because hedge funds vary greatly in size and in the type of their investments.
The report, he added, will lead to "healthier hedge funds, healthier investment practices in those funds, and for a healthier impact of hedge funds on the capital markets in general."