German Finance Minister Peer Steinbrueck said on Thursday the risk that highly leveraged hedge funds could get in trouble was one of the most serious threats to a generally positive global outlook.
Speaking to a small group of reporters at the German embassy during a break from an official visit to Washington and New York, Steinbrueck highlighted his concern that hedge funds could quickly trigger broader, systemic woes.
"There is a sizeable, remarkable number of hedge funds which are not behaving properly on the market," Steinbrueck said without identifying any of them. "No expert that I have met up to now could exclude a potential financial crisis caused by all these leveraged impacts of hedge funds."
As host of this year's Group of Seven meetings of finance ministers and a June summit of political leaders, Germany has made hedge fund regulation its centrepiece issue. Steinbrueck met US Treasury Secretary Henry Paulson on Wednesday and on Thursday headed to New York for meetings with financial leaders including, he indicated, some hedge fund managers.
Paulson has said market discipline is enough to keep lightly regulated hedge funds in line without adding heavy-handed government regulation. Estimates are that hedge funds account for as much as $1.5 trillion of capital, causing nervousness about what could happen if one or more failed. "What does it mean for the creditors and for the counter parties," Steinbrueck asked theoretically."