British Regulators Say Hedge Funds Not To Blame

Nov 21 2007 | 8:11am ET

Hedge funds are not to blame for this summer’s credit crisis, and have dealt with it more effectively than other financial institutions, two top British regulators have said.

Hector Sants, the CEO of the Financial Services Authority, told a conference in London that “hedge funds were not the catalysts or drivers of this summer’s events.” And John Gieve, deputy governor of the Bank of England in charge of financial stability, noted that “hedge funds have not been blown away by the first signs of real market stress, as some commentators thought they would be.”

Gieve said that the fact that hedge funds have become less prominent in the credit crisis, while Wall Street giants and other banks, including Britain’s Northern Rock, have taken center stage, shows that they have been able to adjust to the circumstances.

For his part, Sants suggested that hedge funds should reconsider their models and improve stress-testing, as well as investigate how to improve counterparty risks, in light of this summer’s situation. But he warns that the FSA will take the opportunity to probe illicit activity.

“Recent instability provides the ideal environment for rumors to be spread and for market abuse,” Sants said. “The reduction of market abuse remains a focus of the FSA.”

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