May 19 (Bloomberg) -- German Finance Minister Peer Steinbrueck said he's making progress to get hedge funds to accept a voluntary code of conduct to prevent financial market crises.

Finance ministers from the Group of Eight today endorsed a report that encourages the lightly regulated pools of capital to ``enhance existing sound practice benchmarks, in the areas of risk management, valuations and disclosure to investors and counterparties.'' Some of the funds have already signaled they're ready to develop rules for their own behavior, he said.

``The good news is that the hedge fund industry itself is more and more interested in quality standards, in guidelines, to take care of higher market integrity and investor protection,'' Steinbrueck said in a televised interview after the two-day meeting. ``Interests are converging.''

Steinbrueck, who chaired the gathering near Potsdam, Germany, has been pushing for a code of conduct for hedge funds as rapid growth in the $2 trillion industry stokes concern they pose a potential threat to financial stability. The U.S. and the U.K., where most hedge fund managers are based, have been resisting the move, arguing current practices are sufficient to keep an eye on the pools of capital.

Preventing Amaranth

Steinbrueck wants closer supervision to prevent more failures like last year's collapse of Amaranth Advisors LLC, which lost $6.6 billion from bets on natural gas. Hedge fund failures so far have occurred in a relatively benign market environment, he and Bundesbank President Axel Weber have said.

Germany holds the G-8's rotating presidency. In addition to the U.S. and the U.K. the club includes Russia, Canada, Italy, France and Japan. U.S. Treasury Secretary Henry Paulson's stayed away from the gathering to prepare for meetings with Chinese officials next week, sending his deputy Robert Kimmitt.

Today's G-8 communique didn't mention a code of conduct after Steinbrueck's European Union counterparts last week declined to include a reference to it in a statement. Japanese Finance Minister Koji Omi yesterday said the G-8 shouldn't place ``inappropriate regulations'' on hedge funds, adding that was a ``common view'' shared by Japan and the U.S.

No Disagreement

``There is no significant disagreement among the G-8'' on hedge funds, Kimmitt told reporters. ``Our only point on a voluntary code of conduct is that when governments call on industry to do something voluntarily, it doesn't sound very voluntary.''

Submitting oneself to a voluntary code of conduct is ``a cachet,'' Manfred Weber, general manager of the BDB association of German banks, said in a May 16 interview. ``Every investor and every bank that acts as prime broker and lends money to hedge funds would ask why a particular fund would refuse to accept the procedure.''

The ministers, while praising the funds' contribution to the efficiency of the financial system, today reaffirmed the ``need to be vigilant,'' given the rapid growth of the industry and the complexity of the instruments it trades.

``Assessing the potential risks associated with these activities is complex and is just one example of the broader need to re-evaluate how the global financial markets are evolving, and continue to try and improve their efficiency,'' Canadian Finance Minister Jim Flaherty told reporters after the meeting.

More Dialogue

Steinbrueck said ``we have to continue the dialogue with the hedge fund industry itself, including supervisory authorities, counterparties and creditors to find out if it is possible to have a sort of code of conduct, or guidelines voluntarily and spontaneously implemented and monitored by the hedge fund industry itself.''

A code of conduct, or something similar, won't be agreed by the time G-8 leaders meet June 6-8 in the German coastal town of Heiligendamm, Steinbrueck said. The meeting today and yesterday was ``a whistle stop'' for further debates on hedge funds, Steinbrueck said, adding he's happy the Japanese have pledged to continue discussions during their G-8 presidency in 2008.

European Central Bank President Jean-Claude Trichet lent support to closer scrutiny of hedge funds, telling the Financial Times in an interview yesterday there's an ``emerging consensus'' on the need for a voluntary code of conduct.

To contact the reporters on this story: Thomas Bauer in Potsdam at tbauer@bloomberg.net; Rainer Buergin in Potsdam at rbuergin1@bloomberg.net.

Last Updated: May 19, 2007 11:14 EDT