The Financial Times has a crack today at this increasingly complicated subject. What is clear is that there’s no shortage of Nervous Nellies looking to pull the reins on traders, as pension funds and other more conventional types pour cash their into just about anything (their fault, we’d say). But we wonder if all this fussing won’t ultimately keep hedge funds from being able to experiment freely (with the blessings of their investors). And if that happens, doesn’t it just negate the whole point of the thing?

Hedge funds are increasingly in the public eye. They are being called upon by regulators and lawmakers to explain their workings amid the widening global credit crisis triggered last summer by the unwinding of collateralised debt obligations linked to US mortgages. Tens of high-profile hedge funds have either liquidated or are suffering widespread redemptions due to mounting losses.

"The current problems are making people sit up and think about the issues facing the industry," says Rajiv Jaitly, the hedge funds operations chief at Axa Investment Managers in London.

Regulatory concern is also on the rise due to the escalating power of hedge funds. US Treasury Secretary Henry Paulson in his recent "blueprint" remarks put their potential market impact on a par with investment banks, insurers and retail banks.

On April 15, the US Treasury's President's Working Group on Financial Markets released twin guidelines for hedge fund managers and investors. Two separate private sector groups created in September 2007 prepared these reports.

Led by Eton Park Capital's chief Eric Mindich, the Asset Managers' Committee, comprising nine other prominent investment individuals, told managers that adopting strong business practices that reflect both industry growth and importance in global financial markets was a "crucial responsibility". Similarly, the Investors' Practices Committee chaired by Russell Read, the outgoing investment chief of Calpers, the California Public Employees' Retirement System, set out an exhaustive schedule of investor and fiduciary issues.

Hailing this effort as "critically important", attorney Elizabeth Fries, who heads the alternative investments practice of Goodwin Procter, says: "The PWG approach of focusing not only on the management of funds, but also on investor diligence, is significant. The focus on different stakeholders having an interest and a role in monitoring and shaping the industry and its practices will result in a stronger industry, and avoids sole reliance on a narrower 'self-policing' by only the fund managers, which would have been less robust."

But the initiative also drew criticism from the likes of Connecticut attorney general, Richard Blumenthal, who said these guidelines did not go far enough. Amy Burrus of the Council of Institutional Investors said the Washington DC body is yet to take an official stance on these recommendations as some of its members deemed them satisfactory while others thought they fell short.

Continue reading on FT.com

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