Washington: The current market-based system is the best way to regulate the trillion-dollar hedge-fund industry although improvements can be made, the United States Federal Reserve chairman Ben Bernanke said on 11 April.
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.
India, for instance, does not allow hedge funds to operate in the country.
“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 School of Law.
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 supervision.
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 losses 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 US treasury secretary Henry Paulson for China to allow greater flexibility in its currency, something that US 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.
There are more than 9,000 hedge funds with assets that now top $1 trillion in the US. They traditionally have catered to the rich but smaller investors can be exposed through holdings of pension funds.
The funds, which operate with minimal government supervision, can invest in anything from commodities to real estate. Some hedge funds buy entire companies while others buy and sell stocks like day traders but with billions of dollars at stake.
Representatives of leading hedge funds were scheduled to meet this Sunday with finance officials from the Group of Seven wealthy industrial countries in Washington to discuss whether there is a need to improve global monitoring of the funds.
The discussions, which will take place around the spring meetings of the International Monetary Fund and the World Bank, are part of an effort being pushed by Germany to increase hedge fund transparency. US officials have expressed reluctance about the German proposal.
“The meeting is intended to be a discussion on recent developments and current issues regarding hedge funds,” said US treasury department spokeswoman Jennifer Zuccarelli. “It is an opportunity for G-7 officials to learn directly from representatives of the hedge-fund industry.”
German Chancellor Angela Merkel wants to include improved hedge-fund regulation on the agenda for this year’s summit of G-8 countries taking place in Heiligendamm, Germany, in June. The G-8 includes Russia apart from the G-7 countries such as the United States, Japan, Germany, France, Britain, Italy and Canada.
Tim Paradis in New York contributed to this report.