Central Banks Are Flying Blind on Hedge Fund Leverage

Global central bankers have ducked a chance to push for tight borrowing constraints on the biggest hedge funds, whose importance to core government bond and other financial markets has grown enormously in the past decade. Such funds are at the center of so-called shadow banking, where the use of borrowed money and derivatives is a troubling source of instability that can hurt not only sophisticated investors, but also the pricing and supply of funding to all areas of the economy.

In a world of ever-expanding public debt and volatile politics, it is imperative that policymakers get their arms around this potential epicenter of the next financial crisis, but they remain frustrated by a lack of data and hampered by the lobbying power of the global asset management industry. Hedge funds, dealer banks and others continue to resist calls for more financial reporting and disclosure. The policymakers at the Financial Stability Board have watered down earlier proposals for greater transparency in favor of working with industry to protect confidential information.