Greenspan Calls For Effective Risk Management In Lending To Hedge Funds

by Glen Shapiro, LawAndTax-News.com, New York

09 June 2005

Speaking via satellite to a bankers conference in Beijing this week, US Federal Reserve chairman, Alan Greenspan warned that hedge funds may be obliged to expose themselves to more risks in order to secure high returns, having exhausted the "low-hanging fruit" of easy profits in recent times.

"After its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," he suggested, adding that:

"Continuing efforts to seek above-average returns could create risks for which compensation is inadequate. Significant numbers of trading strategies are already destined to prove disappointing, a point that recent data on the distribution of hedge fund returns seems to be confirming."

However, the Fed chief predicted that in the event of a dramatic fall in the profitability of the hedge fund market, the financial system should escape relatively unscathed as long as the banks lending to the funds have effective risk management strategies in place.

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