Brown, Fillon Seek Tougher Oversight of Hedge Funds Before G-20

By Simon Kennedy

March 25 (Bloomberg) -- European leaders called for greater regulation of hedge funds as they embarked on a round of diplomacy ahead of next week’s Group of 20 summit.

“We must distinguish the most risky activities of hedge funds so that hedge funds are not a way for conventional financial institutions to escape regulation,” French Prime Minister Francois Fillon said after meeting with U.S. officials in Washington yesterday. U.K. Prime Minister Gordon Brown told the European Parliament in Strasbourg, France, that increased oversight should allow “no opt-out for shadow bankers.”

How far the $1.4 trillion hedge-fund industry is reined in will ultimately depend on President Barack Obama. While Fillon said the U.S. agrees “on the idea that hedge funds must be regulated,” Obama yesterday declined to commit to a particular approach, saying it is “important for us to have a regulatory framework for various flows of capital and financial instruments that could pose a systemic risk.”

G-20 leaders convene in London April 2 to find ways of strengthening international regulation in the aftermath of the worst financial crisis since the 1930s. The group’s finance ministers and central bankers said in a March 14 statement that hedge funds should be “registered and disclose appropriate information to assess the risks they pose.”

Call for Crackdown

Some European governments have long said they want to go further and subject hedge funds to oversight resembling that imposed on banks. German Chancellor Angela Merkel called for a crackdown even before the credit crisis began in August 2007, only to run into opposition from the U.S. and U.K.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising prices and participate substantially in profits from money invested.

Hedge-fund managers have said their industry is being made a scapegoat and isn’t to blame for last year’s collapse in stock markets, which saw a 38 percent drop in the Standard & Poor’s 500 Index, the biggest annual decline in seven decades.

Paul Marshall, co-founder of $6.6 billion investment firm Marshall Wace LLP, told the British Parliament in January that hedge-fund leverage was reduced to 1.4 times assets in 2008 from 1.7 times, compared with banks’ leverage of 40 to 50 times. Billionaire investor George Soros cautioned U.S. lawmakers in November against “ill-considered” rules.

Prime Brokers

Seeking to head off the politicians, the London-based Alternative Investment Management Association, the hedge fund industry’s largest trade group, said last month that prime brokers could help collect data to show regulators when risks are becoming concentrated enough to threaten overall market stability.

Obama’s administration is this week outlining its plan for a regulatory overhaul before next week’s G-20 meeting. Former Federal Reserve Chairman Paul Volcker, an adviser to Obama, said Feb. 26 that there should be “strong restrictions” on hedge funds.

U.S. Treasury Secretary Timothy Geithner said during his Senate confirmation hearing in January that the U.S. “should consider requiring registration of hedge funds.” Many hedge funds are already registered and some of the biggest managers support it.

Geithner yesterday joined Fed Chairman Ben S. Bernanke in calling for stronger rules to constrain the type of risk-taking that could endanger the financial system. House Financial Services Committee Chairman Barney Frank said in response that such a systemic-risk regulator should have “the capacity to intervene with any kind of activity, including hedge funds.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net