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Ben Bernanke Warns Hedge Fund Billionaires

• E-mail Terry Keenan

The contemporary art auctions at Christie's and Sotheby's, scheduled for next week, are expected to be blockbusters. The art world is buzzing; for the first time ever, a contemporary painting — Mark Rothko's' "White Center" — will draw top dollar, besting any of the other impressionist works on the block.

What's driving the market in post-war art? You guessed it — hedge fund billionaires.

These people seem to have chosen contemporary art as the asset class, most coveted when it comes to covering their walls. Indeed, whether it's art, restaurants, pre-schools or Caribbean hideaways, many of the hedge fund mavens seem to think alike.

For mere mortals living in and around the hedges, in preferred zip codes of 10021 and 06831, this fact of life has already become a real bummer. Just try to secure a table at Per Se, dodge the chauffer-driven Escalades outside the 92nd Street Y, or buy the hottest handbag at the Saks on Greenwich Avenue and you'll get the idea.

Minor inconveniences to be sure — but if the New York Federal Reserve is correct, the "group think" among the hedge fund elite may have far more fallout than a run on luxury goods. This past week, in an unusual warning, the central bank waved a red flag about the growing risks in the $1.4 trillion hedge fund industry. In fact, Ben Bernanke, "the Fed," said the risks facing the financial system were the highest since the Long-Term Capital Management crisis of 1998.

What caught the Fed's eye was what it described as a rising correlation among hedge fund returns of late. In other words, a large number of funds seem to be going up and down by relatively the same amounts.

On the face of it, there should be nothing wrong with this — we've seen a similar phenomenon in the mutual fund industry for decades. What has the Fed nervous is that these correlated positions are pumped up by leverage — $17 trillion of it, give or take a few hundred billion.

"Similar trading strategies can heighten risk when funds have to close out comparable positions in response to a common shock," the Fed warned.

In fact, the ink was barely dry on the Fed's hedge fund warning when UBS, the biggest money manager in the world, announced that it was forced to shutter its hedge fund at a cost of more than $300 million, due to staggering losses in the sub-prime mortgage market. How so many supposedly smart people were socked by sub-prime seems to re-enforce the Fed's hunch that the "group think" in hedge fund land could be a real problem.

Of course the hedge fund industry denies such speculation and points to a long history of solid returns with just a few blow-ups. But if the Fed is right, the propensity of many hedges to invest, live and spend alike could be a lot more painful for the rest of us than not getting a good table at the Waverly Inn.


Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!