DAVOS, Switzerland (Reuters) – The possibility of a major market crisis caused by financial derivatives is replacing the danger of low interest rates driving asset markets to unstable levels as thetop issue on policymakers’ worry list.
In a keynote speech at the World Economic Forum on Wednesday, German Chancellor Angel Merkel said proposals to shed more light on hedge funds operations would be a priority for her leadership of the Group of Eight industrial nations this year.
“We want to minimize the systemic risks in international capital markets and to raise their transparency — above all, I see the need to catch up with hedge funds,” she told leading business and political leaders.
Hedge funds, which control about $1.3 trillion (660 billion pounds) in assets and often take high-risk leveraged positions in financial derivatives, have doubled in size over the past five years. As private investment vehicles for wealthy individuals, they currently are regulated lightly.
Concerns that hedge funds have taken advantage of low worldwide interest rates to borrow cheaply and invest in high-risk financial instruments escalated after huge losses last September by U.S.-based fund Amaranth Advisors.
