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G8 Now Unlikely To Legislate Against Hedge Funds

by Carla Johnson, Investors Offshore, London

28 December 2006

Although Germany, which will host the 2007 G8 Summit in Heilgendamm next June, announced earlier in the month that it had secured the backing of the US and UK to work for tighter hedge fund controls at the Summit, it now seems to have moderated its ambitions.

German Finance Minister Peer Steinbrueck had stated previously that the Amaranth debacle alerted all to the "new sensitivity" in the United States to the systemic risks of hedge funds, and said: "With the consent of the two most important finance countries, the probability rises that we will reach concrete decisions".

Reining back hedge funds has political resonance in Germany because of their involvement in the 2005 coup at Deutsche Boerse, which saw investors in Deutsche Boerse remove Chief Executive Werner Seifert and Chairman Rolf Breuer, leading the SPD's Franz Muentefering to compare the funds to locusts.

However, a German Finance Ministry official told the Financial Times last week that Berlin now merely sought “to start a discussion” on the issue. “We will not settle this during our presidency,” said the official. “The question is whether we can establish a basis for a follow-up discussion by the end of the G7-G8 presidency.”

US Treasury Secretary Hank Paulson seems unlikely to be in favour of new sets of rules to deal with hedge fund risk, but has said that he is open to a discussion on greater hedge fund transparency. In October, he re-activated the 'plunge protection team' (PPT), originally set up by Ronald Reagan after the 1987 Wall Street meltdown to monitor systemic financial risk. Mr Paulson reportedly asked the team to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis".

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