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24 Oct 2007

Greenspan Concerned With Low-risk Long-term Rates

According to former Federal Reserve Chairman Alan Greenspan, "Low risk-free long-term rates worldwide seem to be one factor driving investors to reach for higher returns, thereby lowering the compensation for bearing credit risk and many other financial risks over recent years", he said in a said in an interview published on Friday by the Federal Reserve board.

"The search for yield is particularly manifest in the massive inflows of funds to private equity firms and hedge funds. These entities have been able to raise significant resources from investors who are apparently seeking above-average risk-adjusted rates of return, which, of course, can be achieved by only a minority of investors."

Greenspan also expressed his concern over, "many new hedge fund entrepreneurs....embracing a strategy of pinpointing temporary market inefficiencies, the exploitation of which is expected to yield above-average rates of return."

Greenspan concluded with, "I trust such an episode would not induce us to lose sight of the very important contributions hedge funds and new financial products have made to financial stability by increasing market liquidity and spreading financial risk, and thereby enhancing economic flexibility and resilience."

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