Another LTCM In The Cards? Not Quite, Says N.Y. Fed

May 3 2007 | 2:00pm ET

Hedge funds may be on the brink of collapse, according to the Federal Reserve Bank of New York. Or, they might not be.

“Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998,” the year Long-Term Capital Management blew up, writes capital markets economist Tobias Adrian in a report issued Wednesday. But he quickly noted that the metrics pointing in that direction could be misleading.

Adrian noted that low volatility is making things look more precarious than they are. “The unusually high correlation among hedge funds in the current environment is therefore attributable primarily to low hedge fund volatility,” he writes, adding that an LTCM-style meltdown is unlikely.

The New York Fed is unlikely to take the prospect of another LTCM lightly: It led the $3.6 billion bail-out of the notorious hedge fund in 1998.

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