Monetary Monitoring Of Hedge Funds Suggested

Date: Wednesday, December 20, 2006
Author: Dailyii.com

Calling more regulation a "knee-jerk reaction" to the proliferation of hedge funds that "may do more harm than good," Andrew Rozanov of State Street Global Advisors has a better idea to keep an eye the ever-growing and more complex industry: Let central banks use some of their "enormous" foreign-exchange reserves and invest them in hedge funds. "Investing a portion of reserves in a broadly diversified portfolio of hedge funds," Rozanov, a manager at State Street, writes in The Wall Street Journal, "could also improve the ability of monetary authorities to monitor, pre-empt and deal with future systemic crisis." Rozanov adds such investments would allow central banks "to extract better information and more timely market intelligence," and allow them to be "proactive, rather than reactive," should another crisis such as that brought on by Long Term Capital Management in 1998. Rozanov states that central banks and monetary authorities effectively constitute the last line of defense. The author, finding it ironic that central banks amassed their hefty reserves in part as a result of "earlier currency crises and hedge fund attacks," notes that banks, with their high level of liquidity, are "lenders of last resort," but also play a crucial role in "knowing where pressures are building up, as well as when ad how to best deploy this liquidity." Rozanov concludes, "A more active involvement from the investment side may be a very effective way to supplement their more formal regulatory and financial stability oversight."