Financial firms should provide more information about their total exposure to hedge funds, a draft report commissioned by the G7 has said. The report, compiled by the Financial Stability Forum, also argues for investors and counterparties to demand frequent updates on potential risks. The $1.5 trillion global industry is loosely regulated and there are demands from governments and investor groups to provide a workable regulatory framework. "It is important to recognise the inherent limitations of summary data in capturing the complex counterparty exposures of major dealer firms to hedge funds," says the FSF report. The report focuses on voluntary strengthening of the current indirect system of oversight, rather than recommending mandatory direct oversight - a step opposed by UK and the US, where most hedge fund managers are based. German chancellor Angela Merkel has set the tighter regulation of hedge funds as one of the targets for her presidency of the G7. UK treasury minister Edward Balls told a conference he is planning to seek the views of other European countries about pooling information and working together on European international regulatory issues concerning hedge funds. “The authorities should be vigilant regarding any of the potential risks posed by hedge funds. As the location for around 90 per cent of the EU's hedge fund management business, the UK - and in particular the Financial Services Authority - has thought hard about getting the regulatory approach to hedge funds right." Mr Balls said a six-monthly survey of banks' exposures to hedge funds through derivatives, secured financing and prime brokerage, could be enhanced if other regulators shared information about their own banks' exposures to the hedge fund industry. "Following discussion with the FSA, we believe that the quality of prudential supervision of hedge fund activity would be enhanced if there were greater co-operation between the key regulators," he said.