WEST PALM BEACH, FL (HEDGECO.NET) – According to published reports, Hedge Funds systemic risks to the global financial system will be examined by the Financial Stability Forum. Lately, concerns havebeen raised that many fund of hedge funds are borrowing heavily in order to boost returns. The Financial Stability Forum was created in 1999, with the mandate of promoting financial security, throughsimilar investigations.
However, it should be noted here that hedge funds have reduced levels of leverage employed in trading, since 1998, when the Long Term Capital Management [LTCM] collapse threatened the global financial system. It took the action of the US Federal Reserve to save what would have been a meltdown in the financial markets. One of the problems leading to the collapse of LTCM in 1998 was attributed to significant levels of leverage employed by LTCM fund managers.
The study will examine �new potential vulnerabilities,� which may be developing within the hedge fund management sector. Many industry analysts and participants have been alarmed at the exponential growth occurring in the global hedge fund industry, as management assts have climbed above the US $1 trillion mark.
Some hedge fund managers worry that today it has become increasingly difficult for anyone to correctly predict what strategies will be yielding alpha in today�s markets. There are also reports that leverage levels employed by hedge fund managers are gradually growing again.
Patrick Sheppard, chief operating officer at Mellon Institutional Asset Management speaking about the challenges in today�s hedge fund industry said, �The market is at an inflexion point. There are few individuals who are passionate about which style areas will produce large returns. Two years, or even 18 months ago, hedge fund managers could look ahead and know where they could make money – where their alpha was coming from.� Sheppard�s firm manages about US $7 billion for investors.
These concerns come in the wake of back-to-back losses encountered by hedge funds during the months of April and May. The Financial Stability Forum will begin such an investigation in September. In its first report in 2000, on hedge funds following the collapse of LTCM, the research organization found that the average hedge fund had reduced levels of employed leverage. They also recommend that the main defense against the repeat of an LTCM type of problem will be a strong implementation of credit controls by contemporary hedge fund managers.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: [email protected]
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