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16 Dec 2006

Germany to Determine if Hedge Funds are a "Systemic Risk"

Germany's Deputy Finance Minister Thomas Mirow held a briefing with reporters on Germany's upcoming presidency of the Group of Eight in 2007, the G8 are the top 8 major industrialized countries, and Mirow plans to examine next year whether hedge funds pose systemic risks.

Mirow said hedge funds were "insufficiently transparent" and the industry had already seen one big hedge fund fail although with few market repercussions. He said industrial nations would try and coordinate efforts to reduce risks posed from hedge funds by promoting more transparency but not necessarily through regulations.

He said, "All over the world, people who are in charge of the stability of the international financial system are dealing with the problem,....There is a sufficient amount of experts saying we should have a closer look at it so to prevent a possible crisis," he added.

"What we would like to know is are there systemic risks, yes or no, and if so, what could we do to deal with it in a reasonable manner," he said.

Mirow's comment came as the U.S. Securities and Exchange Commission prepared to vote on a proposal on Wednesday to raise the limit investors can invest in hedge funds to $2.5 million from $1 million set in 1982.

The SEC's proposed rule, if adopted, would shut the door on a lot of the just-barely wealthy who have been piling into hedge funds lately, although one market analyst said it would likely not affect larger funds with big clients.

U.S. Treasury Secretary Henry Paulson has also weighed in on the issue on December 8 and said it was important to make sure hedge fund liquidity and borrowing were closely monitored, but said they were making a helpful contribution to financial markets.

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