GLOBAL – The growth of hedge funds and the derivatives they use may amplify the impact of the next “discontinuous event”, Standard & Poor’s has warned.

S&P issued its warning as world stock markets slumped following a series of terrorist attacks in central London today.

It said hedge funds’ influence on markets was “out of proportion” to the assets they have under management due to their built-in leverage, or borrowing.

“The rapid growth in hedge funds, and more broadly the financial derivatives in which they often invest, may well amplify the severity of the next discontinuous event,” the rating agency said in a report. It likened the hedge fund market to a surfer riding a wave – which could lead to wipe-outs.

Noting that hedge funds have “obvious liquidity benefits” for markets – S&P added there is “plenty of anecdotal evidence that hedge fund managers have a herd mentality”.

“This can create volatility in certain markets that has a destabilising influence when coupled with large amounts of leverage. The systemic risks are real, but this does not necessarily imply a bad ending.”

S&P said hedge funds and brokers “recognise the risks they face and strive to manage these risks properly”.

Yesterday European Central Bank president Jean-Claude Trichet called for a “transatlantic consensus” on the hedge fund regulation.

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