Praise For Hedge Funds, And A Warning

New York Federal Reserve President Timothy Geithner had nice things to say about hedge funds at a conference in Hong Kong, but at the same time issued a warning.

New York Federal Reserve President Timothy Geithner had nice things to say about hedge funds at a conference in Hong Kong, but at the same time issued a warning. Geithner praised the HF industry for improving liquidity and making the financial markets safer. Yet, he noted in prepared remarks before the speech, “As financial firms demand more collateral, funds are forced to liquidate positions, adding to volatility and pushing down asset prices, leading to more margin calls and efforts by the major firms to reduce their exposure to future losses.” In other words, Geithner is urging regulators to make sure financial institutions have introduced sufficient margin requirements to assure the market doesn’t crack under the stress of high volatility. Geithner’s remarks, according to The Wall Street Journal, did not assess current margin requirements as inadequate, nor did he recommend what regulators should do about them. As an aside following the speech, Geithner urged investors not to rely heavily on HF ratings in deciding whether to invest in a fund, since the rating focus mainly on financial structure and operational issues and not on the risks. He called ratings “a small step toward enhancing the transparency of operations of hedge funds.” At the same meeting, Glenn Steven, deputy governor of the Reserve Bank of Australia, reminded that investors need to be aware of the risks associated with hedge funds, and reportedly did not agree with Geithner that hedge funds necessarily added to market liquidity.