but also high levels of risk. experienced investors know, or should know, that in any given year some hedge funds lose money for their investors and some funds go out of business. those occurrences are only normal and to be expected in a competitive market economy. the working group's recommendations were aimed, instead, at ensuring that when hedge funds fail, as some inevitably will, the effects will be manageable and the potential for adverse consequences to the broader financial system or to real economic activity will be limited. effectiveness of the working group's approach has the approach proposed by the president's working group worked? any answer must be provisional, but, to date, it apparently has been effective. since the ltcm crisis, ongoing improvements in counterparty risk management and the resultant strengthening of market discipline appear to have limited hedge fund leverage and improved the ability of banks and broker - dealers to monitor risk, despite the rapidly increasing size, diversity, and complexity of the hedge fund industry. many hedge funds have been liquidated, and investors have suffered losses, but creditors and counterparties have, for the most part, not taken losses. the general perception among market participants is that hedge funds are less highly leveraged today than in 1998 though, to be sure, meaningful and consistent measurements of leverage are not easy to come by and many newer financial products embed significant leverage in relatively nontransparent ways. according to bank supervisors and most market participants, counterparty risk management has improved significantly since 1998. some of this progress is due to industry - led efforts, such as two reports by the counterparty risk management policy group ( crmpg ) that lay out principles that institutions should use in measuring, monitoring, and managing risk. reviews conducted by bank supervisors in 2004 and 2005 indicated that banks have become more diligent in their dealings with hedge funds. in most cases, substantial resources have been devoted to expanding and improving the staffing of the risk - management functions related to hedge fund counterparties. dealers universally require hedge funds to post collateral to cover current credit exposures and, with some exceptions, require additional collateral, or initial margin, to cover potential exposures that could arise if markets moved sharply. now, risk managers can more accurately measure their current and projected exposures to hedge fund counterparties, and more firms use stress - testing methodologies to assess the sensitivity of their exposures to individual counterparties if the market moves substantially. despite this progress, some concerns about counterparty risk management remain

and portfolios. it is commonly observed that hedge funds are " opaque " - - that is, information about their portfolios is typically limited and infrequently provided. it would be more accurate to say that the opacity of hedge funds is in the eye of the beholder ; the information a fund provides may vary considerably depending on whether the recipient of the information is an investor, a counterparty, a regulatory authority, or a general market participant. from a policy perspective, transparency to investors is largely an issue of investor protection. the need for counterparties to have adequate information is a risk - management issue, as i have already discussed. much of the recent debate, however, has focused on the opacity of hedge funds to regulatory authorities and to the markets generally, which is viewed by some as an important source of liquidity risk. liquidity in a particular market segment might well decline sharply and unexpectedly if hedge funds chose or were forced to reduce a large exposure in that segment. concerns about hedge fund opacity and possible liquidity risk have motivated a range of proposals for regulatory authorities to create and maintain a database of hedge fund positions. such a database, it is argued, would allow authorities to monitor this possible source of systemic risk and to address the buildup of risk as it occurs. various alternatives that have been discussed include a database maintained by regulators on a confidential basis, a system in which hedge funds submit position information to an authority that aggregates that information and reveals it to the market, and a public database with nonconfidential information on hedge funds. i understand the concerns that motivate these proposals but, at this point, remain skeptical about their utility in practice. to measure liquidity risks accurately, the authorities would need data from all major financial market participants, not just hedge funds. as a practical matter, could the authorities collect such an enormous quantity of highly sensitive information in sufficient detail and with sufficient frequency ( daily, at least ) to be effectively informed about liquidity risk in particular market segments? how would the authorities use the information? would they have the authority to direct hedge funds or other large financial institutions to reduce positions? if several funds had similar positions, how would authorities avoid giving a competitive advantage to one fund over another in using the information from the database? perhaps most important, would counterparties relax their vigilance if they thought the authorities were monitoring and constraining hedge funds'risk - taking? a risk of any pre