Reuters- Hedge funds may now pose the biggest risk of a crisis since 1998, when the implosion of Long-Term Capital Management threatened the global financial system, the New York Federal Reserve saidon Wednesday.
The statement represented the bank’s sternest warning to date over the possible fate of the $1.4 trillion industry.
“Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998,” according to a paper written by Tobias Adrian, capital markets economist at the central bank.
Back in 1998, the New York Fed helped bring together Wall Street tycoons who eventually cobbled together enough funds for an unprecedented $3.6 billion bailout.
The LTCM crisis was all the more shocking to investors because of the individuals involved, regarded highly for their market savvy and mathematical prowess.
But with the crisis averted, the hedge fund industry bounced back with a vengeance, increasingly rapidly over the last decade in both size and scope to an estimated $1.4 trillion.
