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Leveraged hedge funds could generate big losses and make the financial system more vulnerable, the Federal Reserve warned Thursday in its semi-annual report on financial stability, as it noted limited data available on risk exposure of nonfinancial investors.
The failure of Archegos Capital Management and the associated losses at big banks "illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks," Fed Governor Lael Brainard said in a statement. "The potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, higher-frequency disclosures."
Overall vulnerabilities associated with elevated risk appetite are rising, she said, calling for macroprudential tools such as the countercyclical capital buffer to address financial stability risks. The Fed board of governors has rejected her calls to put such a buffer in place in the past.
It's not clear the the Fed's near-zero rates and QE program contribute to the buildup of financial vulnerabilities, the report said. Sources have told MNI the Fed is more focused on helping the labor market recovery than addressing high asset prices.