Two committees made up of private sector asset managers and investors that were established by the President’s Working Group released sets of voluntary best practices for hedge fund investors and asset managers last week

The key word here is “voluntary,” The PWG has no intention at this time of making any of the proposals mandatory. That has some hedge fund watchdogs very upset.

The best practices for asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. Eric Mindich, CEO of Eton Park Capital Management, chairs the Asset Managers’ Committee.

For investors, the best practices offered include a Fiduciary’s Guide and an Investor’s Guide. The Fiduciary’s Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor’s Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Russell Read, chief investment officer of the California Public Employees’ Retirement System, the largest pension fund in the US, heads the Investors’ Committee.

After the proposals were announced with great fanfare by Treasury Secretary Henry Paulson, Richard Blumenthal, attorney general of Connecticut, where many hedge funds are based, said “non-binding best practices or voluntary guidelines are an imaginary fence—and virtual farce: They stop nothing.”

Blumenthal says that “The Treasury Department is suggesting faux regulation, creating a dangerous illusion of over sight and engendering a false sense of security. Federal officials are proposing a speed limit, but making compliance voluntary: Some will fail to comply, imperiling all. Instead of voluntary guidelines, the federal government should set specific, common sense rules and provide for federal and state enforcement.”

He points out that “I proposed such measures—to be mandatory—more than a year ago. The subprime meltdown has vividly demonstrated the dangers of deregulation.

“Hedge funds have become too big and too important to remain outside the rules. Suggesting hedge funds do the right thing is not enough. Through risk disclosure and risk control, we must ensure reasonable, rational regulation,” Blumenthal declares.

Bradley Ziff, head of the hedge funds advisory practice at consultant Oliver Wyman, thinks the proposals are excellent and consistent with proposals that were released in February by the Hedge Funds Standards Board in the UK to improve hedge fund oversight.

Ziff, a special advisor to the HFSB and its liason to the PWG, told HFR “this (the PWG’s recommendations) is a significant enhancement in looking at the approaches to risk management, transparency, disclosure and leverage in the hedge fund industry.” Moreover, “there is a symmetry and commonality in the way both groups have examined risk for hedge funds,” said Ziff. “They made significant steps forward. The next step is working toward a harmonization of the two documents.