Hedge Funds Feel the Heat after New York Fed Chief's Warning

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The increasingly competitive hedge fund industry is feeling the heat from US regulators again, but this time the criticism zeroed in on the prime brokers that sometimes lend these funds their money.

The head of the Federal Reserve Bank of New York last month urged brokers-which can sometimes include major banks-to tighten the credit standards that are woven into the overall due diligence process they use when doing business with hedge funds.

"This is particularly important in those cases where there has been innovation in the manner in which credit is extended," said Timothy F. Geithner, president and chief executive officer of the reserve bank. "A reinforced due diligence process also is critical in assessing the operational capabilities of the hedge funds, the quality of their risk management process and execution and compliance infrastructure."

The trillion-dollar global hedge fund industry has come under increasing scrutiny from government regulators as the amount invested in the volatile investment vehicles soars and they accept more capital infusions from pension funds.

Geithner made his remarks in New York City at a meeting co-sponsored by the financial management unit of the Securities Industry Association and the American Institute of Certified Public Accountants. …