Friday, September 29, 2006

China joins chorus of hedge fund fears

China yesterday joined the global push for a crackdown against hedge funds amid growing concerns the unregulated $US1.7 trillion ($2.25 trillion) industry poses a growing risk to the world’s financial markets.

China’s top banking regulator, China Banking Regulatory Commission chairman Liu Mingkang, warned his counterparts to increase monitoring of the “increasingly active” hedge fund industry.

He singled out Asian regulators, saying they should be alert to the potential regional instability which could be sparked by a hedge fund falling into financial difficulty or running short of capital.

Mr Liu’s warning is part of a growing push which gained important momentum in the US on Wednesday when the Securities and Exchange Commission launched a probe into the near-collapse of Amaranth Advisors. The US fund has lost $US6 billion betting on gas futures.

The SEC said it would investigate whether Amaranth misled investors and would examine the role of banks in offering limitless credit.

Australia also renewed its concerns yesterday, with the Reserve Bank using its Financial Stability Review to question how the hedge fund industry would react during “periods of stress”.

The RBA noted that inflows to hedge funds doubled to about $US66 billion in the June half as investors sought out higher-yielding investments.

The cash had added depth to several financial markets, including the credit derivatives market, because hedge funds were active portfolio managers, it said.

“Nonetheless, it is not clear that this liquidity will remain during periods of stress, owing to the very large positions of some hedge funds and the possibility of herd-like behaviour as funds seek to exit positions simultaneously,” the bank said.

Separately, the US Federal Bureau of Investigations (FBI) said the hedge fund industry was spreading too fast beyond its natural niche as a richman’s toy, luring small savers into risky investments.

“It is an emerging threat because of the dollar value and the number of institutions actively taking a look at this,” said Chip Burrus, the FBI’s assistant director. “People that aren’t expecting to have this type of a risky investment in their portfolio end up taking a bath.”

Mr Burrus said the FBI was determined to uphold the integrity of markets and protect citizens who “just get fleeced left and right”.

In softer tones, the US Federal Reserve also hinted at a crackdown, fretting that an ever greater share of the financial system was slipping beyond the oversight of regulators.

“We may have to revisit both the scope and the design of that framework,” said Timothy Geithner, the Fed’s chief in New York.

Last week he warned that “the probability of systemic crisis may rise to levels that are unacceptably high”, unless the authorities step in.

Mr Geithner has been beating the drum for months, fearing that the world’s $US300 trillion derivatives market may be concentrating risk instead of dispersing it.

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