US - Top hedge fund managers, including George Soros, have defended themselves against claims their industry contributed to the credit crisis, but showed openness to stricter regulations being introduced.
He said: "The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it.
"To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work."
While acknowledging it was impossible to prevent bubbles from forming, he said it should be possible to keep them within tolerable bounds.
However, he said, this could not be done by controlling only the money supply. He said: "Limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past.
"This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical."
Soros also said financial engineering needed to be regulated and new products registered and approved by the appropriate authorities before they could be used.
He commented: "Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations."
However, he warned: "There is a real danger that excessive deregulation will be succeeded by punitive regulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism."
Philip Falcone, managing director, Harbinger Capital Partners, said he supported additional government regulation requiring more public disclosure and transparency for hedge funds, as well as for public companies.
Falcone also supported the creation of a public exchange or clearinghouse for derivatives trading, especially credit default swaps (CDS).
This week's edition of Professional Pensions is out now.
Industry Voice: Sponsored by Eaton Vance
BNY Mellon has launched a range of reporting tools to help institutional investor clients track and evaluate portfolio investments based on environmental, social and governance (ESG) issues.
PP speaks to BESTrustees director Heather McGuire about her views on the CMA's review into the investment consultant and fiduciary management markets.