Greenspan slams hedge funds

US Federal Reserve chairman Alan Greenspan said the hedge fund industry, after its "recent very rapid advance", could "temporarily shrink and many wealthy fund managers and investors could become less wealthy".

"Continuing efforts to seek above-average returns could create risks for which compensation is inadequate," he said. "Significant numbers of trading strategies are already destined to prove disappointing, a point that recent data on the distribution of hedge fund returns seem to be confirming."

Financial market participants have increasingly cast their minds back to the near collapse of highly leveraged bond arbitrage fund Long-Term Capital Management in 1998. Long-Term had to be rescued by a consortium of 14 Wall Street banks when the forced sale of its $US100 billion of assets threatened to disrupt the entire world financial system.