Hedging Bets

Hedge funds seem to have been designed as the ideal plutocratic villain for some novel of financial intrigue. These highly secretive investment groups control more than $1 trillion in assets but are so heavily leveraged that their total positions are thought to equal more than $3 trillion. The essence of their business is speculation, which they engage in on the basis of proprietary mathematical models that are guarded more closely than state secrets. The managers rake in obscene sums of money--the highest-paid made $1.7 billion in 2006. And yet they are virtually unregulated by any government.

The Bush Administration sees nothing wrong with this situation. For two years it has stalled efforts by Germany to push the G-8 to monitor hedge funds. The funds, and their private-equity cousins, are controversial in Germany because they've been "restructuring" many old-line German companies. Germany's vice chancellor has referred to the funds as "locusts," and the Schröder government started investigating ways to make the industry more transparent. Current Chancellor Angela Merkel has continued that effort, and the German finance ministry drew up plans for a code of conduct for G-8 leaders to approve at the June G-8 summit. But even a voluntary code of conduct was too much for the Bush Administration. In the end, the G-8 leaders did little more than agree to remain "vigilant" regarding the systemic risks posed by hedge funds.

The problem is that regulators don't even collect information about the industry they're supposed to be vigilant about. Since hedge funds are open only to limited numbers of big investors, they escape all the usual reporting requirements. Even the timid attempt by the Securities and Exchange Commission to impose a registration requirement was struck down by a federal court last summer.

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