Philipp M Hildebrand: Financial Stability and Hedge Funds: Effective and Ineffective Supervision Speech by Mr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, Diskussionsforum «Nachbarn Deutschland-Schweiz: Impulse für die Zukunft», Berlin, 9 November 2005. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The hedge fund industry has grown rapidly over the past few years and it has become an important segment of global financial markets. The possibility to use leverage and a high degree of flexibility are key elements of a broad range of investment strategies which have made the hedge funds industry very profitable. Hedge funds have been an important source of innovation in the traditional asset management industry and they have rendered financial markets more liquid, more efficient and more flexible. Nonetheless, the rapid growth of the industry and the excessive use of leverage may result in potential systemic risks which are relevant to central banks, unlike prudential matters. Overall, industry leverage is difficult to measure. However, several studies suggest that it is lower than at the time of the near collapse of LTCM in 1998. Even so, temporary excessive levels of leverage with single hedge funds can not be ruled out completely. A crisis in the hedge fund industry might therefore spill over to their primary trading partners, the major investment banks.
Recent developments suggest that the expose of inflationary pressures is being shifted in general on the falling direction. The higher transmission of the recent increasing trend of the raw material prices in the world market composes a risk in terms of the increasing direction of consumer prices. The performance of exchange rate, of inflationary expectations and the country fiscal position, shall continue to condition the balance of risks in future. 2  BIS Review 122/2009  The expected relaxation of these occurrences in terms of a well-stabilised financial environment shall provide the needed spaces for the growth of monetary stimulus in the economy. BIS Review 122/2009  3