G7 to discuss hedge fund risk report

Date: Friday, April 13, 2007
Author: Reuters

WASHINGTON, April 12 (Reuters) - G7 officials say a draft version of a report on potential risks posed by hedge funds will be discussed at a gathering of rich industrial countries in Washington this week.

Finance officials from the Group of Seven -- the United States, Britain, Canada, France, Germany, Italy and Japan -- meet on Friday at the U.S. Treasury Department ahead of semiannual meetings this weekend of the International Monetary Fund and World Bank.

At the last formal meeting of finance ministers in Essen, Germany, in February, the G7 asked the Financial Stability Forum to draw up a report on the possible risks posed by the $1.5 trillion hedge fund industry.

The FSF, now headed by Bank of Italy Governor Mario Draghi, was established in 1999 in reaction to the Asia currency crisis that rocked foreign exchange markets.

"The report has been drawn up by the FSF secretariat and it has obviously been evaluated by Draghi and will be discussed by the G7 in Washington," a source said.

In addition, G7 deputies are expected to meet representatives of the hedge fund industry over the weekend. The hedge-fund industry wants to ward off bids to regulate their activities more tightly and has the effective backing of the U.S. Treasury Department, which has said that market discipline will keep them from excessive risk-taking.

The rapid expansion of hedge funds -- essentially big pools of lightly regulated investments that are aimed primarily at wealthy individuals and institutions -- is causing concern for policy-makers because of the often-risky nature of their trading strategies.

In addition, there are potential severe repercussions for global financial markets if a big fund runs into difficulties.

Britain and the U.S. have been more skeptical about a regulatory clampdown than some others, particularly Germany.

Britain's light touch to regulation has made it a thriving hedge fund center. Seventy percent of Europe's hedge funds are based in London and around 90 percent do their banking there.

"Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant," the Essen G7 communique said.

"The assessment of potential systemic and operational risks associated with these activities has become more complex and challenging."