The sell-off in US equities in early August showed that highly leveraged hedge funds operating in a low-liquidity environment could magnify market shocks, the Federal Reserve said on Friday.
Financial markets fell sharply in the first week of August in what was seen then as a reflection of concerns over the US economy and rising interest rates in Japan, which turned against investors who had borrowed cheaply in yen in a popular trade known as the yen carry.
In a report, the Fed blamed August’s sudden jump in market volatility in part on “highly leveraged hedge funds” quickly selling down their positions to meet internal volatility targets — not margin calls from bank lenders.
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