The U.S. Federal Reserve has warned that the current system of using the hedge fund “could not be dangerous”, indicating the collapse of City of Archegos as an example of the hidden difficulties in the global financial industry.
An annual report by the US Central Bank’s economic stability found that inflation was “higher than in the past” and “could be at higher risk than at risk of starvation”.
But the Fed has also admitted that regulators do not have the tools to monitor the risks of traders like Bill Hwang, who placed large bets on stocks through the Archegos family office.
“The Archegos incident is a reflection of the low profile of the hedge fund and serves as a reminder that hedge fund fundraising strategies cannot be too risky,” said Lael Brainard, the Fed’s chief executive who heads the central bank’s committee on economic stability.
He added: “The potential consequences of the financial crisis which could affect the financial crisis underscore the need for more disclosure.”
A warning about the hedge fund risks came as the Fed also expressed concern that an increase in the global epidemic “could lead to economic hardship in the coming markets and other European countries”. Power in developing countries could be raised if global interest rates “rise sharply”, it added.
In the US, the central bank said “some businesses and families are still in dire straits” despite the economic boom, low interest rates and government support that have helped corporations and consumers.
The Fed said “banks still have a lot of money, and the power for broker-dealers is limited”. The existing methods of “hedge fund” are more than their past, “he said, adding that the report” does not cover significant risks from the hedge fund or other waste disposal “.
Hwang’s actions on the wire were difficult to monitor because the family offices needed to be kept secret and because he used switches known as swaps. These tools have enabled Archegos to benefit from a one-off investment in the same revenue share as the rest of the site.
The banks that took over part of the wager tried to mitigate their risks by buying the available funds, but faced difficulties when Hwang’s economy collapsed and he failed to meet the limits. Banks have lost their shares, suffering more than $ 10bn losses – including $ 5.4bn of Credit Suisse and $ 2.9bn of Nomura.
In addition to the frustration of the US authorities is that the massive losses in the Archegos system have been met by bank offices overseen by senior officials in other countries.
U.S. officials have expressed concern over secrecy in the financial markets after the Archegos explosion. In March, the Financial Stability Oversight Council, led by US Secretary of Treasure Janet Yellen, re-launched its hedge fund management team to assess the risks posed by the sale.
Gary Gensler, the new chairman of the Securities and Exchange Commission, told the housing committee this week to ask his colleagues to consider new requirements in repaying all the money the Archegos have returned.