Financial Update - Volume 19, Number 3 - Hedge Funds Take Center Stage at Atlanta Fed Conference

Financial Update
Vol. 19, No. 3,
Third Quarter 2006


Guynn Retiring
on Oct. 1

Booklet Imparts
Katrina's Lessons

Fed Holds Hearings on
Mortgage Practices

Atlanta Fed Conference
Spotlights Hedge Funds

New Brochure Touts
Bank Account Benefits

Birmingham Branch to
Convert to Cash Depot

Fed Reduces Exposure
to Daylight Credit

Fed Chair Speaks on
Energy Costs' Effects

Schools Gather to Discuss
Community Development

Bills Seek Tougher
Data Security

Fed Gov. Bies Addresses
Mortgage Markets

Olson Resigns Fed to
Lead Pension Board


Data Bank

Circular Letters


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Hedge Funds Take Center Stage at Atlanta Fed Conference

Conference poster
Speaking at the Atlanta Fed's Financial Markets Conference on hedge funds in May, Federal Reserve Chairman Ben Bernanke said high-risk, high-reward hedge fund instruments, which have grown substantially in number and asset size, need to be monitored for risk. However, he did not recommend that the funds be regulated and supervised like commercial banks.

“Direct regulation may be justified when market discipline is ineffective at constraining excessive leverage and risk-taking but, in the case of hedge funds, the reasonable presumption is that market discipline can work,” said Bernanke.

Participants discuss potential risk
Bernanke's appearance highlighted the Atlanta Fed's conference, which assembled Fed officials and other policymakers, financial industry practitioners, analysts, and academics to examine hedge funds and potential risks they pose to the nation's broader financial system and economy.

Bernanke speech
Conference agenda and papers

Dominant themes brought out
Policy papers presented at the conference included “Hedge Funds: An Industry in Its Adolescence,” “Hedge Funds and Investor Protection Regulation,” “Systemic Risk and Hedge Funds,” and “Corporate Governance and Hedge Fund Management.” From these discussions, several major themes emerged at the conference:

Hedge funds vary widely in their investment strategies and, therefore, their risk exposure. They are so different, in fact, that analysis of issues such as systemic risk and investor protection might better focus on the investment strategies they pursue rather than on the funds as a group.
In the United States, only wealthy individuals and institutional investors are allowed to invest in hedge funds, based on the value of an investor's liquid assets. However, in Europe less wealthy people can invest in them. Consequently, Europe might serve as a natural laboratory to study the effect of regulations designed to protect hedge fund investors.
There is little information on which to conclude how much risk hedge funds pose to the nation's overall financial system. There is likewise no clear consensus among researchers and practitioners about how much the financial system would be damaged if one or several hedge funds encountered serious problems.

While hedge funds will continue to attract scrutiny and analysis, some conference participants noted that monitoring the funds—both domestically and overseas—will yield valuable information about their performance and risk levels.