Reuters.uk – Hedge fund investments in less liquid assets such as private equity or property could be a potential problem for financial market stability, the Financial Services Authority said onWednesday.<\/p>\n
Overall, however, the chances that hedge funds with their significant exposure could cause serious market disruption or erode confidence is low, the FSA said in its 2006 outlook.<\/p>\n
“Although there are now some quite large hedge funds … none of them match the size or leverage of (U.S.-based) Long-Term Capital Management, whose near failure caused significant market disruptions in 1998,” the FSA said.<\/p>\n
“(But) hedge funds appear to continue to increase their investments in a range of asset classes which are inherently less liquid than conventional assets (such as exchange traded stocks) or whose liquidity is more likely to be reduced in times of market stress (such as credit derivatives).”<\/p>\n
Attempts by hedge funds to close illiquid positions at times of market turmoil do raise the possibility of volatile and disorderly markets, the FSA said.<\/p>\n