AFX News Limited – Germany’s Bundesbank said unfavourable trends in the hedge fund industry, as well as the sector’s influence on market dynamics and liquidity could become asource of risks to the German financial sector.
In its Financial Stability Review report, the bank said the increasing dependency of earnings on investment banking and proprietary trading is making financial intermediariesmore vulnerable to adverse market developments.
‘Disruptive effects might be generated by hedge funds, whose major presence in some market segments has a considerable impact on price movements,’ it noted.
It said hedge funds can amplify market dynamics, especially if they are forced to adjust their portfolios quickly and collectively, such as in the case of leveraged positionsand homogenous trading strategies.
‘Unfavourable trends in the hedge fund industry could also engender direct counterparty and investor risks to the German financial sector. However any influence caused byhedge fund activities on price dynamics and market liquidity in the financial markets is likely to be of greater importance,’ it said.
