A GAO report today said hedge fund transparency has improved recently, but the funds still pose a potential risk to the overall economy.
Despite enhanced transparency, some hedge fund investors lack the ability to analyze the information received from hedge funds because of the complexity of financial instruments and investment strategies used, according to the Government Accountability Office report. In addition, the report said some creditors may be relaxing credit standards to attract and retain hedge fund clients. If the risk controls of creditors and counterparties are inadequate, their actions may not prevent hedge funds from taking excessive risk, the report said.
The report also said marketplace forces may be limited in their ability to restrain hedge fund activity because larger hedge funds use multiple prime brokers so no single broker may have all the data necessary to assess the total leverage of a hedge fund client.
(Click here to see the entire GAO report.)