Hedge funds prepare for a clipping

World leaders' plans to step up regulation of hedge funds will make the US$1.4 trillion ($2.4 trillion) industry a "scapegoat" for the near-collapse of the financial system, the funds' lobby group said.

The Group of 20 leaders say they will extend oversight to all financial institutions important to global financial stability including "systemically important" hedge funds for the first time.

The industry would be regulated by a proposed Financial Stability Board made up of members of the G20 and European Commission.

"Our industry has turned out to be a scapegoat for other issues," said Andrew Baker, chief executive of the London-based Alternative Investment Management Association.

G20 leaders also called for stricter limits on executive pay, credit-rating companies and risk-taking by banks.

The agreement was the result of negotiations among UK Prime Minister Gordon Brown and German Chancellor Angela Merkel and French President Nicolas Sarkozy, who have pressed for a crackdown on traders and lenders to combat the financial crisis.

The rules on hedge funds are of "decisive importance", German Finance Minister Peer Steinbrueck said at a briefing in London yesterday. Introducing rules for hedge funds was a theme of Germany's presidency in 2007 of the Group of Eight top industrial nations.

"The current crisis is a banking crisis and the major international reports on it so far have concluded that the hedge fund industry's role was marginal," Baker said.

"Although we agree that any entity that provides banking services should be regulated as a bank, the vast majority of hedge funds do not fall into this category."

While more than 6800 hedge funds were operating at the end of 2008, only about 4 per cent had assets of US$5 billion or more, according to Chicago-based Hedge Fund Research.

"Tens" rather than hundreds of them will be affected by the G20's proposals, said Chris Rexworthy, a former Financial Services Authority executive who now advises hedge funds on regulatory matters at London-based IMS Consulting.

"Every country is going to take a slightly different approach, but it's almost certainly going to be linked to size, strategy and investment type," Rexworthy said.

"For many hedge funds operating in the UK, the current FSA regime will be deemed sufficient in relation to their current size and strategies." More than 80 per cent of Europe's hedge funds are based in London and regulated by the FSA.

In the US, the hedge fund industry has already been put on notice of greater regulation.

- BLOOMBERG