SWEDEN - The Swedish central bank has suggested that pension funds' hedge fund investments should be limited to protect pension savers' investments.

"If one wants to protect pension savers' investments, one should limit the pension funds' investment opportunities, not the hedge funds' operations," said Riksbank deputy governor Lars Nyberg in a speech.

He referred to the recent losses at the Amaranth energy-trading hedge fund, whose clients included Swedish buffer fund AP7. He said the matter showed that the financial system had become more resilient since the LTCM crisis in the 1990s.

Nyberg cited figures from the Swedish Investment Fund Association that Swedish hedge funds account for SEK85bn and said he finds it difficult to claim that hedge funds follow the prevailing trends to a greater extent than other investors.

Nyberg said: "New financial crises will occur and hedge funds, which have become an integral part of the modern financial markets, will probably be involved.

"The large capital flow to the sector has meant, not unexpectedly, that profitability has declined and it is not unreasonable to expect that a number of funds will consequently be forced to close down after more or less substantial losses.

"However, the advantages of the hedge funds' operations exceed the risks from a welfare perspective. The Riksbank's view as regards further regulation is that the focus should be on the hedge funds' counterparties - particularly the systemically important banks - being able to manage their risks.  I

"The arguments for further regulation of hedge funds are in this context weak."

The opposite view is being taken by the Riksbank's counterpart in Germany.

The Bundesbank said in its Financial Stability Review called for hedge funds to adopt a code of conduct "covering not only corporate governance and risk management aspects but also exacting transparency rules".

The bank said the "persistently high correlation of hedge funds; return gives cause for concern that market reversals might be intensified by co-moving portfolio shifts".

And a number of "mis-speculations" by hedge funds had exposed shortcomings in risk management - "even though their implications for the financial system have remained limited in the currently robust market setting".

The Alternative Investment Management Association said the Bundesbank "failed to reflect on the increased levels of corporate governance from which hedge funds now benefit".