G8 Host Germany Fails to Convince on Hedge Fund Issue

Germany had put hedge funds on top of the agenda of its year-long G8 presidency given its concerns that rapid growth in the increasingly powerful sector could destabilize the entire global financial system.

But the world's richest nations -- Britain, Canada, France, Germany, Italy, Japan, the United States and Russia -- have so far spectacularly failed to find a common line on the issue.

The lack of consensus was apparent again in a declaration released on the second day of the three-day summit of G8 leaders in this Baltic coast resort, where Germany's goals were effectively swept under the carpet.

"We discussed recent developments in global financial markets, including hedge funds," the text said.

Highly speculative

Hedge funds are highly speculative and aggressive investment instruments that are estimated to manage close to one and a half trillion dollars in assets worldwide.

An estimated 9,000 such funds are currently in operation, most of them based in the US and Britain.

Berlin fears a possible domino effect should one of the big funds fail. But it has been gradually forced to scale back its ambitions for increased transparency and more disclosure in the sector in the face of fierce resistance, particularly from Britain, the United States and Japan.

In their declaration on Thursday, the G8 members said that hedge funds had "contributed significantly to the efficiency of the financial system."

Complex risks

Nevertheless, "the assessment of potential systemic and operational risks associated with these activities has become more complex and challenging," the statement continued.

"Given the strong growth of the hedge fund industry and the increasing complexity of the instruments they trade, we reaffirm the need to be vigilant."

The G8 said it "welcomed" a specially commissioned report compiled for the G8 by the so-called Financial Stability Forum which recommended the industry "review and enhance existing sound practice benchmarks."

And the grouping said it also welcomed "that the FSF will report to finance ministers as from October of this year on the progress and actions taken in respect of these recommendations."