Hedging In Hedge Funds

First, credit controls. Then...?

When Federal Reserve Chairman Alan Greenspan testified to Congress after the $3.6 billion bailout of Long-Term Capital Management, he said it is "questionable" whether global hedge funds should be regulated by the U.S. alone. Instead, he said, regulators should impose controls on bank lending to the funds. Now, international central bankers and regulators are endorsing the recommendation. And the Fed itself plans to issue new rules for hedge-fund lending in early February.

Will regulation of hedge funds themselves be next? Perhaps--if credit controls prove inadequate. A panel of the Basle Committee on Banking Supervision, a group that oversees international bank lending, warned on Jan. 28 that some hedge fund activities may threaten the world financial system. But many funds are domiciled in loosely regulated offshore financial centers, and tighter regulation could face big political obstacles.

The panel wants banks to closely monitor loans to hedge funds and become harder-nosed about the collateral hedge funds offer. Collateral can plunge in value when markets fear that huge portfolio liquidations are imminent.

Since Greenspan's October speech, markets have calmed. But his colleagues want insurance against another ltcm-style debacle.

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