The European Union's top financial services official said Thursday that hedge funds need to give investors more information about the risks to their money.
EU Commissioner Charlie McCreevy said he would propose new rules for hedge funds and private equity funds by the end of April _ but cautioned that a backlash against speculative financiers could stifle much-needed investment for Europe's recession-hit economies.
McCreevy said regulators needed to focus on the flow of credit to hedge funds and private equity to tackle the "undesirable levels of leverage in hedge funds, or excessive lending to private equity managed companies."
Cheap credit helped swell both types of investments over the past decade. The sudden tightening of credit late last year hit them both hard.
Hedge funds saw risk-wary investors withdraw $152 billion in capital in the fourth quarter, according to Hedge Fund Research Inc., causing funds to sell off assets and fueling rapid price drops. Markets worried that private equity funds could not pay back high debt they built up to buy up businesses.
McCreevy said investors could manage their exposures to both hedge funds and private equity by better understanding the risks they face.
"Much of the present difficulty encountered by hedge funds and private equity portfolio companies stems from the sudden tightening in cash and securities lending," he told a conference organized by the European Commission.
Investors who place money with hedge funds are usually "experienced or institutional" players who do not need strict investor protection rules and can usually measure their own risk, he said.
But they do need information "to provide effective due diligence of the funds' liquidity and risk management, valuation process as well as on the basic investment proposition."
McCreevy _ who was initially reluctant to regulate hedge funds _ said the sector now needs rules because their large volume of trades affect the financial system.
He said private equity funds needed a separate approach because worries focus on the huge debt some companies took on to buy up businesses _ debt they may not be able to service _ and the way the funds deal with other investors, trade unions and workers.
He took a swipe at European socialist politicians who have attacked both kinds of investors because they are often activist shareholders demanding management changes or radical restructuring and job cuts at companies they invest in. Some fear this comes at the expense of workers.
"Those who do not like activist investors should not have a fixation with hedge funds," McCreevy said. "Any policy responses that seek to tackle wider problems by targeting hedge funds and private equity will fail."
McCreevy said the EU's existing financial supervision "aided and abetted the super-bubble" because it did not stem the flow of debt through the financial system.
The European Commission will next week lay out its views on how to reform financial oversight, building on a report published Wednesday by French banker Jacques de Larosiere that calls for more powerful supervisors and more pooling of information between nations.
McCreevy said any EU rules needed to "ideally be supported by international consensus to the greatest extent possible," particularly on how hedge funds affect global markets.
European nations will likely discuss this with the U.S., China, India and Brazil when the G-20 group of nations meet in April to chart out ways to fix the financial system.
