Political pressure to increase scrutiny of hedge funds rose in Thursday when a senior US lawmaker urged the Department of Justice to focus on the possibility of fraud in hedge fund activity.

The call by Senator Arlen Specter came during a Senate Judiciary committee at which Gary Aguirre, a former Securities and Exchange Commission lawyer, blamed "powerful interests" for halting his investigation into Pequot Capital Management, a leading hedge fund.

Mr Aguirre said he was told by SEC bosses that he would not be able to subpoena John Mack, former chief executive of Credit Suisse First Boston. The instruction came in the same week Mr Mack was being considered for the top job at Morgan Stanley.

Mr Specter, chairman of the judiciary committee, said: "I want to know what they [the justice department] are doing. I want to know what cases they've had. I want to know what cases are under investigation and what's going to be done."

The question of who regulates hedge funds was thrown into doubt last week when a federal court threw out a requirement that they register with the SEC.

Richard Blumenthal, attorney general in Connecticut, called on Congress to deal with the regulatory gap created by the change.

He said: "The number and financial power of hedge funds - now reportedly more than 13,000 with assets exceeding $24 trillion - provide fertile opportunity for potential fraud based on false or deliberately misleading stock analyst reports. Either Congress or the SEC must act quickly to fill the void."

The political fireworks came against a backdrop of faltering performance at many of the world's biggest hedge funds. Figures obtained by the Financial Times show that the recentmarket turmoil wrong-footed a wide swathe of hedge funds, many of which have seen their gains for the year wiped out in the past few weeks.

Nearly every category of hedge fund has suffered, but Japan-focused funds have been particularly hard hit.

The fact that so many funds were affected in the same way highlights what some in the industry see as a worrying trend towards a herd mentality - a central concern of US lawmakers.

Jane Buchan, managing director of hedge fund investor Pacific Alternative Asset Management, said: "The phenomenon of serial correlation in hedge funds returns is distressing."

Paul Tudor Jones's BVI Global fund was down 3.7 per cent through June 21, leaving the $5bn fund up 0.9 per cent for the year. Highbridge saw its $1.5bn event-driven fund shed 4 per cent through June 15, putting it down 2.1 per cent for the year.

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