Hedge funds escape international curbs: No reason for renewed turmoil in markets, says Tietmeyer

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CENTRAL bankers of the 11 leading industrial countries decided yesterday against establishing a new set of regulations to curtail the activities of the hedge funds, which have been blamed for much of the upheaval in global bond markets in recent weeks.

Speaking after their meeting in Basle, Switzerland, Hans Tietmeyer, the Bundesbank president, said he and his colleagues saw no reason to introduce regulation for hedge funds.

The governors, Mr Tietmeyer added, also saw no reason for renewed turmoil in the financial markets, believing that the speculative froth that built up in the markets last autumn has blown off.

Mr Tietmeyer, who chaired the meeting, said the bankers discussed whether derivatives, such as futures and options, and risk-hedging techniques had played a role in recent market volatility.

'We are willing to follow closely what is going on with these new techniques, but we are not thinking for the time being that there is any reason for specific regulations,' he said.

But the Bundesbank president indicated that the central banking group, known as the Group of Ten, accepted that it might be difficult to impose hedge fund regulation. 'We think we have to live with these new techniques,' he said.

Nevertheless, he said the bankers believed that the markets had now entered a calmer phase, so there was less cause to worry. 'We feel that the markets have already corrected to a big extent,' he said.

Central bankers would maintain their cautious course on monetary policy. Mr Tietmeyer said: 'We do not see any need for fundamental changes.'

In Washington, Lawrence Summers, assistant treasury secretary for international affairs, confirmed that the US Treasury would also not seek hedge fund regulation.

Analysts said the outcome of the talks was to be expected in view of the difficulty of defining which were actually 'hedge funds', seeking maximum profits from speculation based on large borrowings.

These institutions, usually managed in the US and based in offshore centres outside the G10 sphere of influence, borrow money to buy bonds in cash and futures markets and often gear up speculative positions several times their capital worth.

Thus when heavy selling, attributable to hedge funds such as George Soros's Quantum Fund, got under way after the US Federal Reserve raised interest rates early last month there were widespread fears about the financial health of banks dealing in derivatives with these funds or lending to them.

Despite Mr Tietmeyer's comments commercial banks, chiefly in the US, are expected to come under discreet informal pressure to curtail their loans to hedge funds.

The Federal Reserve is known to be deeply concerned at the risk to financial markets posed by the hedge funds, which are estimated to have between dollars 45bn and dollars 80bn of speculative investments under management. Although little hedge fund lending is carried out in London, the Bank of England is worried that British banks carry out increasing speculative bond investment on their own account.

Bond markets staged a recovery yesterday on hopes of lower German interest rates after a modest pay increase agreed between employers and engineering workers.