May 11–United States and British securities regulators will meet leaders of the hedge fund industry this week to express growing concerns that the lightly-regulated sector could be luring lesssophisticated investors.

Dozens of top managers, including Soros Fund Management and Carlyle Asset Management Group, will be represented at the Washington DC conference, which will also review trading strategies and regulations.

Securities & Exchange Commission (SEC) chairman William Donaldson has recently expressed concern that the private partnerships for wealthy individuals and institutions are being marketed to a broader range of individuals. Donaldson is also concerned about allegations that some hedge funds have tried to manipulate the stock market by issuing biased research reports.

The meetings will be held against growing controversy about derivatives. Last week US Federal Reserve chairman Alan Greenspan supported the use of financial derivatives to manage risk and said that they had been a stabilising factor underpinning the US economy. He added that those who purchased derivatives, including banks, had spread their risk and helped lessen the severity of the 2001 recession.

His remarks are in stark contrast to those of Warren Buffett, the chief of Berkshire Hathaway and a widely-followed investor. He regards derivatives as a “timebomb”; his recent remarks about them further intensified the debate about the suitability of hedge funds for less sophisticated investors.

Donaldson has been investigating the sector for about a year and this week’s conference is another indication the regulator could be moving to bring greater SEC oversight.

Its concerns have been heightened by a spate of high-profile fraud cases — Michael Berger hid $400 million (UKpound 248 million, E348 million) of losses from investors for four years — and fears about conflicts of interest involving money managers who operate mutual funds and hedge funds.

“Hedge funds are becoming increasing prominent participators in today’s markets and, in aggregate, continue to grow in size,” Donaldson said. He is expected to tell the delegates, who represent an industry of around 6,000 funds with some $700 billion under management, that its investigation has yet to reach any conclusions but is looking at a range of possibilities, from increasing minimum investments and wealth requirements to improving transparency.

The funds have had little regulatory involvement because it was thought investors using the funds could assess the risks. This contrasts with mutual funds, which are rigidly regulated according to their asset classes and investment profile.

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