International securities regulators have launched an investigation into the growing influence of hedge funds in an attempt to assess the risks investors could face from their exposure to the fast-growing asset class.
The study, announced recently by the International Organisation of Securities Commissions (losco), a global body for financial market regulators, will take a different direction from other work by regulators, which have examined the systemic and market risks posed by hedge funds' blistering growth.
Michel Prada, chairman of Iosco's technical committee and head of the AutoritÚ des MarchÚs Financiers, France's stock market watchdog, said: "Hedge funds are developing and being commercialised to individual investors.
"Therefore, securities regulators have to step in and make sure [they] have sound systems, rules and practices [in terms of] their administration, risk management and fund valuations."
Iosco's investigation goes further than existing moves by national regulators, which have generally argued that they should not attempt to protect investors in hedge funds and that any moves towards heavy-handed regulation would merely drive the funds to offshore centres, where they would face even less scrutiny.
In the past year, the US Securities and Exchange Commission has launched a drive to register hedge funds.
The UK's Financial Services Authority has published a discussion paper that highlighted the role hedge funds play in the financial system and suggested closer monitoring of the largest London-based funds.
Following an investor revolt at Deutsche B÷rse, Gerhard Schr÷der, the German Chancellor, also expressed concern about the rise of hedge funds, though he subsequently backed away from any action.
There are an estimated 8,000 hedge funds, controlling assets of about $1,000bn. Some investment management groups have begun to offer watered-down versions of hedge fund products to retail investors as the funds grow in number and status, though most funds are only accessible to institutional investors and the very wealthy.