Regulators and participants are strengthening market discipline but oversight is still needed, the report says.
Hedge funds have improved their risk-management and disclosure practices in recent years, but they still pose of systemic risk to the investor and need careful monitoring by regulators, a Government Accountability Office report released today said.
“We need to ensure that we have adequate knowledge of this sector of our capital markets and effective market discipline, especially as the pension assets of more and more Americans are invested in hedge funds,” said House capital markets subcommittee chairman Paul Kanjorski, D-Penn., in a statement.
Reps. Kanjorski, Rep. Michael Capuano, D-Mass., and House Financial Markets committee chairman Barney Frank, D-Mass., released the GAO report, titled, “Hedge Funds: Regulators and Market Participants Are Taking Steps to Strengthen Market Discipline, but Continued Attention is Needed.”
Since the near collapse of Long-Term Capital Management LP of Greenwich, Conn., in 1998, regulators have increased their reviews of hedge funds, the study said.
The three congressmen requested that the GAO conduct the study in 2006.
Although registered hedge funds have improved disclosure and transparency, the report said, “not all investors have the capacity to analyze the information they receive from hedge funds.”
Most large hedge funds use more than one prime broker, so no individual firm is able to assess a hedge fund’s total leverage, the report said.
From 19998 to 2007 the number of hedge funds grew from 3,000 to more than 9,000, and assets under management increased globally to more than $2 trillion from about $200 billion.
Defined benefit pension plans’ investment in hedge funds have grown from $3.2 billion in 2001 to $50.5 billion in 2006, the report released today said.
The GAO is to release a more extensive report examining the scope of public and private pension funds’ exposure to hedge funds in the coming months.
