Friday, June 02, 2006

ECB Issues Warning Concerning Hedge Funds

Source: Financial Times

For the first time, the European Central Bank (ECB) specifically addressed hedge funds in its most recent “financial stability review.” They categorized the risk hedge funds pose as “major.”

The problem they see is that the various funds are becoming too similar in their individual diversification. More plainly, the vast majority of hedge funds available are all are comprised of very similar components.

Due to this close positioning of the funds, the fear is that a change in business conditions could lead to a comparable reaction by the various funds' managers. According to Lucas Papademos, the vice-president of the ECB, if a this occurs, the “implication for asset prices are going to be more pronounced.”

There is evidence of concern stemming from the increased popularity of hedge funds. Considering the view that there is an “essential lack of any possible remedies,” there have been calls for close monitoring and “greater transparency” of hedge funds.

For more focused discussion of hedge funds, please view our FAQ concerning hedge funds, available here.

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