WEST PALM BEACH, FL (HedgeCo.Net) – Moody�s said the hedge fund industry is facing the risk of multiple failures. These failures, according to Moody�s, may result from the growing number ofunregulated investment groups which also engage in similar tactics used by hedge fund companies. There is also the issue that many small brokerage firms have put in place stiffer risk controlparameters; this condition has given rise to a more intense competition among such group.
Moody�s said such development has become a big risk by giving rise to lax controls. It charged, “There is a risk of a domino effect resulting from multiple failures of hedge funds engaged in the same directional bets,� adding “Increased competition among lower-tier prime brokers creates an incentive for more lenient due diligence and relaxed credit conditions such as term margin agreements� the investment rating firm said.
Moody�s also said that Prime Brokerage operations could be extremely profitable. Many brokerage firms have started to tighten due diligence and disclosure requirements, such control mechanisms have also led to competition among the smaller firms to pick up the slacks resulting from the tougher requirements imposed by larger firms. This competition may indeed produce more lenient standards among the smaller brokerage companies.
The agency also said many banking supervisors worry that a lax transparency and regulation of hedge funds in light of the accelerating growth in hedge fund�s managed assets may lead to potentially dangerous conditions.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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