Report: Hedge Funds Pose 'Systemic Risk'

Feb 25 2008 | 2:17pm ET

Hedge funds remain a danger to the economy, according to a Congressional report released today.

“There is still potential for systemic risk” to the economy, Rep. Paul Kanjorski (D-Pa.), head of the House Capital Markets Subcommittee, said of hedge funds, in spite of industry efforts to improve management and transparency. “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.”

The report, prepared by the Government Accountability Office, was released by Reps. Kanjorski, Michael Capuano (D-Mass.) and Barney Frank (D-Mass.), who commissioned it in 2006.

Hedge funds “require continued monitoring by regulators and counterparties,” it concludes.

“Not all investors have the capacity to analyze the information they receive from hedge funds.”

In spite of the dire warnings, none of the three lawmakers behind the report called for new legislation to rein hedge funds in.

“The dynamic nature of the financial markets requires that we continue to examine evolving practices in this area,” Frank said.

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