Global financial market watchdog group, the International Organisation of Securities Commissions (IOSCO), said on October 05, it was drawing up rules to regulate the increasingly powerful hedge fund industry.
Technical advisers to IOSCO meeting in Frankfurt did not set a date for when the rules would be ready, but said the hedge fund industry, now comprising about 8,000 funds managing $1 trillion in investments, would be consulted from the start.
Some securities supervisors are concerned about the growing power of hedge funds, which sometimes take risky leveraged positions in markets to turn a quick profit.
"Hedge funds pose a big threat to the stability of the world financial system," said Jochen Sanio, head of German financial supervisor BaFin, which hosted the IOSCO conference.
"It cannot and must not be that the largest market participants in the world taken together are not controlled at all," Sanio said.
Hedge funds were heavily involved in unseating the top management of Deutsche Boerse, the Frankfurt stock exchange operator, earlier this year. They were attacked as "locusts" by German politicians, who said they chewed up companies and destroyed substance for short-term profit.
Michel Prada, head of the French financial markets authority AMF, said IOSCO experts would focus on hedge funds because they were evolving so quickly.
"They have started to be commercialised to individual investors," Prada said.
"Securities regulators have to make sure hedge funds have sound rules and prudent practices when it comes to administration, risk management and valuation of the funds," he added.
IOSCO regulators will start by trying to gain a better understanding of how hedge funds work but have a long way to go.
"There is not even a unanimous definition of what a hedge fund is," Prada said.
However, regulators have become faster at working together and can now draw up consistent rules within a couple of years, he said, adding that many hedge funds were located in just a few key markets, cutting down on the regulatory task.
Not all regulators or even companies - the supposed victims - share a sceptical view of hedge funds, many of which use long-term investment strategies.
"They are our shareholders and we love them," said BASF Chief Financial Officer Kurt Bock, who nevertheless called for greater transparency in hedge fund activity.
The European Commission's Internal Market and Services Commissioner Charlie McCreevy has ruled out proposing EU rules for hedge funds for now.
There appears to be little appetite among US regulators and government for regulating hedge funds more heavily either.
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