Hedge Fund Risks Warning (AP) (26-02-2008)

WASHINGTON (AP) -- A government report was released on Monday showing that despite closer monitoring by regulators, hedge funds still pose significant risks to the financial system, particularly as hedge funds are inclined to take substantial risks with increasingly large sums of money, which potentially can spread and be magnify losses throughout the financial system.

The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.

Hedge funds are also big players in the market for derivative investments such as credit default swaps, essentially insurance contracts that protect investors against default of certain securities.

Some have suffered due to the credit crisis that has ravaged Wall Street over the past year. For example, New York-based Bear Stearns Cos. managed two hedge funds that filed for bankruptcy last year after making losing bets on mortgage investments.

Still, the report noted that regulators including the Securities and Exchange Commission and the Federal Reserve have stepped up scrutiny of the parts of hedge fund activity that are able to oversee. The SEC oversees nearly 2,000 hedge fund advisers, accounting for about one-third of total hedge fund assets under management in the U.S., the report noted.

The report also said that hedge fund advisers "have increased their level of disclosure" in response to demands from big investors like pension funds.

 Source AP