| Hedge Fund Observer : EDHEC speaks out as champion of hedge funds |
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| 02/07/2006 | |
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EDHEC Risk, which specialises in hedge fund research, never misses an opportunity to defend its main study subject. So when the European Central Bank's analysts wrote in a report that hedge funds were running a correlation risk in a context of lesser liquidity, they were the first to step in the fighting arena. "The possibility of tighter global liquidity conditions in the period ahead has raised investor redemption risk for hedge fund managers, particularly as the share of less liquid assets has reportedly been increasing", write the analysts in the ECB Financial Stability Review. "The correlations of returns within some hedge fund investment strategies and among strategies have remained high or have even increased, raising the risk of disorderly synchronous exits from similar trades." The ECB also points out the risk generated by "uncontrolled" investment activities from hedge funds. By all accounts, this is definitely not within the EDHEC-Risk's hedge fund world view. "Although the article's evidence in favour of an increase in correlation is weak, we can demonstrate that there are many reasons – other than similar positions – for increasing correlation", said the EDHEC-Risk analysts in a statement. "Furthermore, the claim of an upward trend in illiquidity exposure is not further substantiated. We argue that mechanisms such as lock-up periods effectively protect hedge funds against a mismatch between asset liquidity and funding liquidity." EDHEC-Risk also dismisses the ECB's conclusion about the systemic risk that could be generated by hedge funds hypothetical "disorderly synchronous exits". This, they say, is pure speculation. « It should also be noted that no study has been able to demonstrate the implication of hedge funds in any systemic crisis so far. While the question of systemic risk is of importance, we do not dispose of enough data to reliably address this question at this stage." J.L. |
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