Philipp M Hildebrand: Financial Stability and Hedge Funds: Effective and Ineffective Supervision
Central bank: snb | Type: speech | Date: 2005-11-09

Philipp M Hildebrand: Financial Stability and Hedge Funds: Effective and
Ineffective Supervision
Speech by Mr Philip p M Hilde brand, Member of t he Gove rning Board of t he Swi ss Na tional Ban k,
Diskussionsforum « Nachbarn Deutschland-Schweiz: Impulse fü r die Zu kunft», Berlin, 9 Novemb er
The complete speech can be found in German on the Swiss National Bank’s website ().
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The hedge fund industry has grown rapidly over t he past few years a nd it ha s become an important
segment of global financial markets. The possibility to use leverage and a high degree of flexibility are
key elements of a broad range of inve stment strategies which have made th e hedge fun ds industry
very profitabl e. Hed ge fun ds h ave be en an imp ortant sou rce of innovation in the tradition al asse t
management industry and they have rendered financial markets more liquid, more efficient and more
flexible. Nonetheless, the rapid growth of the industry and the excessive use of leverage may result in
potential systemic risks which are relevant to central banks, unlike prudential matters. Overall, industry
leverage is difficult to me asure. However, several studies suggest that it is l ower than at t he time of
the near collapse of LTCM in 1998. Even so, temporary excessive levels of leverage with single hedge
funds can not be ruled out completely. A crisis in the hedge fund industry might therefore spill over to
their primary trading partners, the major investment banks. Hence, regulation and supervision in order
to minimize systemic ri sk should concentrate on the leading glo bal investment banks to make sure
that adequate counterparty and liqui dity risk man agement systems and processes are im plemented.
Against the backdrop of scarce resources, we should refrain from opening new regulatory fields which
are not relevant for systemic risks.