Hedge funds look set to retain their dynamic role in the financial markets without fear of external regulation, though international central bankers urged the industry to do more to ensure discipline and transparency.
G8 finance ministers meeting this weekend rejected calls from their host, Germany, to move towards a voluntary code of conduct for the booming industry.
Instead, the ministers spoke only of the need for "vigilance" in monitoring hedge funds.
"Given the strong growth of the hedge fund industry and the increasing complexity of the instruments they trade, we reaffirmed the need to be vigilant," the finance ministers of Britain, Canada, France, Germany, Italy, Japan, Russia and the US said in a joint statement on Saturday.
This tallies with comments by the Bank for International Settlements (BIS) -- the Switzerland-based "central bank of central bankers" -- which said hedge funds were an important source of market dynamism.
Hedge funds "have generally been a spur to continuing financial innovation, and, by absorbing risk, have provided greater depth and liquidity to financial markets," the bank said in its first report on the industry since 2000.
Hedge funds now account for a significant share of turnover in many markets and of core financial institutions' dealing volume and trading revenues, it said.
Hedge funds are largely unregulated pools of capital, whose managers often use borrowed money to take hugely complex and highly risky positions in a broad range of financial securities and commodities.
Germany has been particularly vocal of late on the need to regulate the industry and European Central Bank Governor Jean-Claude Trichet also told the Financial Times on Friday that there was an "emerging consensus" on the need for some sort of regulation.
However, such a consensus was not in evidence at the G8 meeting in Potsdam, just outside Berlin.
Speaking there on Friday, Japanese Finance Minister Koji Omi said that "any inappropriate regulation that could hurt free market mechanisms should be avoided," adding that this view was also shared by the US.
The BIS did acknowledge the need for further measures to guard against systemic risks and complacency, but argued the industry was fully capable of carrying this out itself.
The industry "should review and enhance existing sound practice benchmarks for hedge fund managers in the light of expectations for improved practices set out by the official and private sectors," the BIS said.
"There has been some erosion in counterparty discipline recently ... reflecting the strength of competition for hedge fund business. These complement other signs of complacency about risks in markets," it said in its report.
But there is a "generally high" awareness of risks.
"Rapidly changing products, rising trading volumes and closer market integration underscore the importance of continuing attention to infrastructure improvements," the BIS said.
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