HEILIGENDAMM, Germany (Bloomberg) — The Group of Eight industrialised nations pledged to remain alert to the potential risks for global financial markets from the rapid rise of hedge funds."Given the strong growth of the hedge-fund industry and the increasing complexity of the instruments they trade, we reaffirm the need to be vigilant," G-8 leaders said in a declaration published yesterday during a summit in the Baltic resort of Heiligendamm, Germany.

Assessment of "potential systemic and operational risks" related to the $2 trillion industry "has become more complex and challenging", the text states.

The declaration reflects the German government's urge for tougher oversight of hedge funds, though it falls short of Germany's original proposal for an industry code of conduct. That call was resisted by the US and the UK.

Germany views the surge in the lightly regulated pools of capital as a risk to financial markets and has used its joint chair of the G-8 and European Union to push voluntary self- regulation.

Hedge funds have more than tripled in number since a bailout of Long Term Capital Management LP in 1998, and are back in the spotlight after Amaranth Advisors LLC lost a record $6.6 billion in September.

The statement on hedge funds effectively approved a communiqué drawn up by G-8 finance ministers at a May 19 meeting in Potsdam, near Berlin.

G-8 leaders today also noted the "good condition" of the world economy and forecast "global imbalances" will unwind gradually. Growth "has moderated to a more sustainable pace in the US while domestic demand has strengthened in Europe and remains supported by robust investment in Japan", according to the declaration.

The G-8 text suggests conditions are in place for the world economy to continue expanding at a brisk pace. On April 11, the International Monetary Fund said the global economy will grow 4.9 percent this year and next, following a 5.4 percent expansion in 2006.

Outside the G-8, countries in "emerging Asia have taken first steps on the road toward a more flexible exchange-rate regime" while oil producing countries have increased investment in oil production capacity "and many have made prudent use of their additional export revenues to promote the diversification of their economies".

"In emerging economies with large and growing current account surpluses, it is crucial that their effective exchange rates move so that necessary adjustments will occur," the statement said.

"Global imbalances have been showing some signs of stabilisation more recently and deficits have been relatively easily financed," the G-8 said. Still, "an orderly adjustment, which is in the interest of the world economy, will take time".