fed speech, 2006-09-14
If individual dealers to a very large hedge fund each operate with adequate knowledge of the risk profile of the fund, if they each make conservative judgments about their potential direct exposure to the fund in a stress scenario, if they limit the overall exposure of the firm as a whole to the broader market distress that might accompany that failure of a major hedge fund, if they compensate for the uncertainty in making these judgments by charging appropriate risk premia or building in a greater cushion against adversity, and if the supervisory constraints on the core institutions adequately offset the moral hazard that comes with that relationship, then the financial system as a whole will be less vulnerable to distress in the hedge fund sector.
Sentiment: neutral
Topic: financial_stability