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April 10, 2006
EU Financial Stability Dependent On Hedge Funds
In a recent report, the Economic and Financial Committee of deputy finance ministers and central bankers indicated that the financial stability of the European Union is becoming increasingly dependent on hedge funds. At the same time, it expressed a dire need for regulators to make extra efforts to understand the risks that this creates.
In the recent years, the investment in hedge funds has steadily increased. The figure now stands at 8,000 or more funds now with more than $1 trillion under management. This increases the concerns as the increased exposure of banks to the risk posed by hedge funds can lead to a major collapse in the eventuality of a disaster.
According to the report, special attention is required to monitor hedge funds in order to ensure financial stability. And this need is felt more strongly for hedge funds that are located in offshore centers as these are usually difficult to monitor. Reuters Italia reports:
According to the report, hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systemic risks. Action should be targeted to ensure efficient monitoring of hedge fund risks by banks... and the prudence... and transparency of regulated financial institutions' involvement in hedge fund activities.
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