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Fed Chairman Urges Hedge Fund Caution

Financial authorities must stay attuned to any potential risks posed by the growth of hedge funds, an investment domain of the wealthy that has become more popular with smaller investors, Federal Reserve Chairman Ben Bernanke suggested Tuesday.

"Authorities should and will try to ensure that the lapses in risk management of 1998 do not happen again," Bernanke said, referring to the collapse of Long-Term Capital Management, a hedge fund that had received a $3.6 billion private bailout.

Bernanke made his remarks to a conference in Sea Island, Georgia, on hedge funds and risk organized by the Federal Reserve Bank of Atlanta. A copy of his remarks was distributed in Washington.

While Bernanke made a case for close monitoring of hedge funds, he shied away from advocating that they be directly and more heavily regulated like banks.

"Direct regulation may be justified when market discipline is ineffective at constraining excessive leverage and risk-taking but, in the case of hedge funds, the reasonable presumption is that market discipline can work," Bernanke said.