Wednesday, February 21, 2007

Frank Talk on Hedge Funds

As the new chairman of the House Financial Services Committee, Barney Frank has much of Wall Street bending his ear these days. But his office has fielded few calls from hedge fund managers — and he says he is not surprised.
“They hope I am the sleeping dog that they can let lie,” Mr. Frank, a Massachusetts Democrat, said in a meeting this week with reporters and editors at The New York Times.
Mr. Frank has previously said there should be more regulation of hedge funds, investment pools that raise funds from institutional investors and wealthy individuals. In recent months, however, he has softened that stance, suggesting that more information is needed before any decision on possible legislation is made. Congressional hearings on hedge funds are scheduled for early April.
Mr. Frank said that one potential concern was the large amount of debt that hedge funds use to amplify the size of their bets, a technique known as leverage. Using leverage, hedge funds have magnified the reach of their already considerable assets, which have reached more than $1 trillion worldwide according to some estimates.
“Theoretically, they have more money than there is money,” Mr. Frank said.
One question is whether, if many of these highly leveraged bets go bad, it could create instability in the global markets, causing what Mr. Frank described as “a run on the world, not just a run on the bank.”
The hedge fund Amaranth Advisors made big bets with big leverage and was forced to shut down last year after its investments led to billions of dollars in losses over a few days.
Another issue likely to emerge at the April hearings is whether it is appropriate for managers of public pension funds to put assets into hedge funds. Some lawmakers worry that such investments could put workers’ retirement assets at risk, and Mr. Frank said that there was likely to be “some restriction on the pension fund-hedge fund interaction.”
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