July 11 (Bloomberg) -- U.S. House Financial Services Committee Chairman Barney Frank said hedge funds pose potential risks to the financial system and that the existing federal regulatory structure may not be adequate to handle them.

``We have a kind of an easy consensus that there is a potential problem here that we wish we were more sure about how to approach,'' said Frank, a Massachusetts Democrat.

Frank told reporters after the hearing that the committee would probably go ahead with legislation he first proposed in March that would require hedge funds to retain their data, including e-mails, for law-enforcement purposes.

Washington officials have been debating whether new rules are needed to guard against failures in the hedge-fund industry since Amaranth Advisors LLC, a Greenwich, Connecticut-based hedge fund collapsed last September after losing $6.6 billion on natural-gas trades. Some lawmakers have expressed concern that a fund failure may harm the retirement savings of Americans.

The hearing is the third in a series Frank has held to examine the risks posed by private-equity and hedge funds to U.S. workers and markets.

Last month, New York-based Bear Stearns Cos., the fifth- biggest U.S. securities firm, announced it would lend $1.6 billion to one of its hedge funds to rescue it from collapse following bad bets on subprime mortgages.

Bachus Warning

Representative Spencer Bachus, the committee's top Republican, warned against further regulating the industry.

``The last thing we want to do is drive investment -- whether it's hedge funds or private equity funds and their capital -- offshore,'' said Bachus, of Alabama.

The House panel heard from officials representing the agencies that comprise the President's Working Group on Financial Markets, including the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

They told the committee that market discipline is the best approach to limiting the systemic risk posed by hedge funds, reiterating a conclusion they reached in a report they released in February. They added that they are continuing to monitor the industry for potential problems.

``This emphasis on market discipline neither endorses the status quo nor implies a passive role for government,'' Fed Governor Kevin Warsh said.

More Safeguards

Warsh said banks should implement more safeguards as structured credit products grow increasingly complex.

Hedge funds are private, largely unregulated pools of capital that allow managers to share in investment gains. Hedge fund assets have grown five-fold since 1999 to about $1.4 trillion, according to the Treasury Department.

Since taking over as chairman in January, Frank has led hearings exploring the risks of pension-fund investment in hedge funds and the impact of private-equity firms on American workers.

Frank introduced legislation last year that would have required hedge funds to register with the SEC. The measure, which stalled in Congress, would have reinstated an agency rule rejected last year by a federal appeals court in Washington.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: July 11, 2007 15:42 EDT