LTCM Vet Says Hedge Funds Pose No Systemic Risk

Jun 2 2009 | 1:12am ET

A former partner at hedge fund cautionary tale Long-Term Capital Management is taking aim at the rationale for greater regulation of the industry.

Hans Hufschmid, who now runs hedge fund administrator GlobeOp Financial Services, said that no single hedge fund today presents a systemic risk to the global financial system. Hedge fund critics around the globe have pressed for stricter rules and greater transparency requirements for the industry, with many claiming that a large hedge fund failure could undermine the global economy.

Nonsense, Hufschmid says. “I don’t think a hedge fund today is big enough to pose a systemic risk” as his own LTCM did in 1998, he told Reuters. The Connecticut hedge fund collapsed amidst the Russian debt crisis a decade ago, leading to a $3.5 billion bailout.

Hufschmid credited prime brokers for putting the brakes on some of the worst excesses exemplified by LTCM, including huge amounts of leverage,

“Prime brokers would manage that,” he said. “They would say, ‘We’re not lending you that much money.’”

“The market regulates it to some extent,” he added. “You couldn’t have a situation where one hedge fund takes excessive risks with one prime broker.”

Hufschmid also took aim at the idea that hedge funds are responsible for the global economic crisis.

“The triggers of this crisis (mortgages, house prices, credit deterioration, etc.) caused the excessive leverage in the system to tumble,” he argued. “The de-leveraging that followed involved hedge funds; to the extent they were risk-takers they too had to downscale like everyone else.”

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