GAO: More HF Attention Needed

Date: Wednesday, February 27, 2008
Author: Emii.com

Hedge funds advisers have improved disclosures and transparency regarding their operations, but even more attention to a host of problems is warranted, according to a report released yesterday by the Government Accountability Office. The report, more than 18 months in the making, found since the collapse of Long Term Capital Management nearly 10 years ago, hedge funds have made great strides in reining in the industry, but problems still exist. “Market participants...suggested that not all investors have the capacity to analyze information they receive from hedge funds,” the report states. Creditors and counterparties may have conducted more due diligence and tightened control standards, but, the report says, “because most large hedge funds use multiple prime brokers...no one broker may have all the data necessary to assess the total leverage of a hedge fund client.” The report further notes that if risk controls of creditors and counterparties are inadequate, “their actions may not prevent hedge funds from taking excessive risk.” These factors, notes the GAO “can contribute to conditions that create systemic risk if breakdowns in market discipline and risk controls are sufficiently severe that losses by hedge funds in turn cause significant losses at key intermediaries or in financial markets.” The report notes that the President’s Working Group has taken steps to alleviate the risk by issuing guidance and forming private sector groups but the GAO says “it is too soon to evaluate their effectiveness.” Richard Baker, new president and CEO of the Managed Funds Association, says he expects, after studying the findings of the report, that “remedies may be found, for any meaningful concerns, that will enable the preservation of market function” of the hedge fund industry.