The Federal Reserve is worried that hedge funds aren’t accurately measuring risk, and that the fall of Archegos Capital could be a harbinger of what’s to come. Gary Silverman and James Politi report in The Financial Times:
The US Federal Reserve has warned that existing measures of hedge fund leverage “may not be capturing important risks”, pointing to the collapse of Archegos Capital as an example of hidden vulnerabilities in the global financial system.
The US central bank’s semi-annual report on financial stability found that some asset valuations are “elevated relative to historical norms” and “may be vulnerable to significant declines should risk appetite fall”.
But the Fed also acknowledged that regulators lack the tools to monitor the risk taking of traders like Bill Hwang, who placed large leveraged bets on stocks through his Archegos family office.
“The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks,” said Lael Brainard, the Fed governor who chairs the central bank’s committee on financial stability.
She added: “The potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, higher-frequency disclosures.”
The warning about unseen hedge fund risks came as the Fed also expressed concerns that a worsening of the global pandemic “could stress the financial system in emerging markets and some European countries”. The impact in emerging market countries could be exacerbated if global interest rates “were to rise abruptly”, it added.
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