"Do we really believe that any Joe Sixpack who shows up at Goldman Sachs, Morgan Stanley or UBS will be given a fat check to trade as a hedge fund?" he asked. "No. That is not what happens." Brokers check their hedge fund clients' positions twice a day," said McGreevy, "because it is their job to make sure that no element of the banking industry is overexposed".

"The evidence that hedge funds have increased the efficiency of our capital markets and increased liquidity is indisputable," added McCreevy.

Perhaps largely in order to placate German authorities worried about foreign intrusions into local capital markets, the G7 meeting in Essen commissioned an update on a year 2000 report by the Financial Stability Forum, a panel set up after financial crises in the 1990s to monitor global market solidity.

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

Germany's finance minister Peer Steinbrück, who hosted the Essen meeting, has been working towards an agreement on hedge funds ever since a group of funds crossed the country's finance sector, famously being described as 'locusts' after their involvement in the 2005 coup at Deutsche Boerse, which saw investors in Deutsche Boerse remove Chief Executive Werner Seifert and Chairman Rolf Breuer.

Sandy Weill, former CEO of New York-based Citigroup reportedly called on the G7 meeting to apply greater controls on the hedge funds industry, but the US and the UK headed off attempts by the Germans to install mandatory regulation this year.

Following the meeting, the Alternative Investment Management Association (AIMA), a global hedge fund and alternative investment industry association responded to the G7 statement, welcomed the G7's agreement that hedge funds have contributed significantly to the efficiency of the financial system. AIMA points out that hedge fund managers are already sharing information and data with their regulators – who have not expressed specific concerns nor backed up calls for further disclosure. Additionally European managers already have to comply with a multitude of European wide regulations such as MiFID and CAD2.

Axel Weber, a member of the European Central Bank's Governing Council told last month's Davos forum that a Code of Conduct would be better than more regulation. 'I prefer a market-based orientation to regulatory actions,' said Weber, 'but we have to see how deep we can wade into these waters by having an open dialogue with the hedge funds.'

'We need to try hard and we need to make a bigger effort to get the industry to make more voluntary commitments and maybe do a bit of arm-twisting along the way,' he added.

The approach of the US is more to tighten the rules for investment in hedge funds: the Securities and Exchange Commission said recently that it is planning to increase the minimum net worth of a hedge fund investor from the current US$1m to $2.5m.

There are transparency concerns as well, though. William Donaldson, ex-Chairman of the SEC said last month: 'The rulemaking doesn't address the ongoing problem of the rapid growth of hedge funds and the lack of knowledge that regulators have; it is an increasing concern not only in the United States, but to regulators around the world.'

Perhaps pushed by institutions wanting to reduce the risks of their hedge fund investments, a number of senior US regulators, both in Congress and at the SEC, are moving in the direction of stricter regulation, although the courts' demolition of the SEC's registration plans last year should hardly give them encouragement. On the other hand, the new Democrat ascendancy in Congress will perhaps open the flood-gates to a tide of restrictive Democrat-inspired legislation.

After last autumn's G20 meeting in Melbourne, South Africa's Finance Minister Trevor Manuel said that the group (which he is chairing for the next year) would delve into the private equity market and hedge funds in the coming year.

"There's a lot of secrecy about what they do," Manuel added. "When people have been able to invest such large pools of funds without any regulatory environment, then you could induce instability because they can buy and sell stocks of companies and in fact bring about very, very rapid ruin."

The world's financial establishment has periodic fits of angst about hedge funds, and indeed the private equity market has absorbed anything up to US$200 bn in borrowings this year. But most economists think that the effect of hedge fund activity at least is to reduce rather than foment instability.

"There's also an enormous push by private equity funds to take companies out of public scrutiny, to make sure they're delisted," Manuel said. "In the context of financial stability, these are … issues that merit attention."