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August 12, 2005
Do hedge funds still pose a threat of blowing up?
Opinions seem to be divided in the question of impact of hedge funds on the financial market. While there are some who feel that the market has the potential for going all wrong, there are others who opine that the possibility is rare. SEC chief Roel Campos mentioned to a gathering that people are placing high bets which if they go wrong can snowball into a catastrophe such as that experienced in 1998 with LTCM. The sheer size of bets is such that if anything goes wrong say in Russia, it could impact for example student loans back in the US. The speed with witch the industry has grown makes it quite vulnerable to a fall. Such fears have been growing in the minds of people. Now it is felt, that just because we have not witnessed a fall since 1998 does not imply immunity from a downfall in the future. Phillippe Bonnefoy, investment adviser to Cedar Partners mentioned recently that the chances of a looming disaster exist but the probability of the same happening in a current lower leverage environment is ‘slim’. Hedgeco.net reports:
“According to him, hedge funds no longer use much leverage in trading compared to the LTCM days. In addition to the tighter and stricter controls, which have been put in place by managers to help them control risks.”
Read More: Hedge Fund blowup speculations are exaggerated
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