LUXEMBOURG - The Grand Duchy has passed legislation to encourage hedge funds to use its administrative services, promising no official scrutiny of sub-advisers or fund promoters of new vehicles.

The custodian, named directors and auditors of the new Specialised Investment Funds will come under the watch of the financial authority, the Commission de Surveillance du Secteur Financier (CSSF).

But parties actually investing money or out raising client capital will not be regulated. Luxembourg puts no quantitative restrictions on investments. Wealthy individuals also face no official bars or checks, so long as they have €125,000 to invest.

A CSSF spokesman said that the legislation was intended to introduce greater flexibility and lighter regulation for investors.

The legislation was passed, however, only days after finance ministers of the G7 issued a statement that expressed concern at the growth of hedge funds and the complicated financial instruments some employed. "Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant," said the statement. "We will exchange views with the private sector and ask the Financial Stability Forum to update its 2000 report on highly leveraged institutions."

The Alternative Investment Management Association, which counts many hedge funds among its members, pointed out that European and Asian hedge funds operated already under the highest financial supervision. It added that the 2000 report was initiated after the collapse of one fund, Long Term Capital Management.