Fed says asset prices may be vulnerable

Brainard: Archegos event shows more hedge-fund disclosure needed

A rising appetite for risk across a variety of asset markets is stretching valuations and creating vulnerabilities in the US financial system, the Federal Reserve said in its semiannual financial stability report.

“Vulnerabilities associated with elevated risk appetite are rising,” Fed Governor Lael Brainard, the head of the Board’s financial stability committee, said in a statement accompanying the report released Thursday. “The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.” In this environment, prices may be vulnerable to “significant

declines” should risk appetite fall, the Fed report noted. Brainard and the report mentioned losses at banks stemming from dealings with Archegos Capital Management, and the governor called for “more granular, higher-frequency disclosures.” “The Archegos event 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,” she said. The Managed Funds Association, which represents hedge funds, took issue with Brainard’s remarks.

“It is unfortunate policy makers incorrectly conflate hedge funds with unregulated entities like individuals and family offices,” Association President Bryan Corbett said in a statement. “Hedge funds are well regulated” by the Securities and Exchange Commission.