Geithner seeks more hedge fund regulations

— -- Within a bold framework to regulate financial markets presented Thursday, Treasury Secretary Timothy Geithner laid out a plan to more tightly oversee hedge funds, which have gone lightly regulated for years.

Calls for stricter supervision of hedge funds have intensified because they have become so large and invest in complex securities. The concern is that major losses by a large fund or its failure could put the broader economy at risk. Indeed, hedge funds — typically secretive investment partnerships with select clienteles — today manage $1.4 trillion in assets, compared with just $38 billion in 1990, according to Hedge Fund Research.

"Today, the consequences of (hedge funds') failure is greater. They need to be subject to a higher set of standards," said Geithner at a hearing of the House Financial Services Committee.

Last year's discovery of Bernard Madoff's Ponzi scheme also exposed the dearth of information about the investment advisory fund he ran, which took money and clients referred by other funds.

The Treasury's plan would require all private investment funds — including hedge funds, private equity and venture capital — that manage assets above a threshold that has yet to be defined to register with the Securities and Exchange Commission. These funds would have to disclose their trading positions, on a confidential basis, for regulators to assess whether the size of those risks pose a threat to the country's financial stability.

Banking analysts hailed this as a necessary step to protect financial markets.

"Some of these entities wield enormous power, enough to shake big institutions like Citi, and we should at least know what they are doing, just like the regulated segments of the industry," says Richard Bove, financial analyst at Rochdale Securities.

Hedge funds have fought regulation for over a decade. One reason is to keep rivals from learning their investment strategies.

They argue that regulation isn't needed because their clients are wealthy individuals who are presumed to be knowledgeable investors aware of the risks. However, funds have recently drawn money from the less wealthy, and they are increasingly used by pension funds, exposing a wider universe of investors.