Large hedge funds that co-invest alongside clients have "kept a lid" on their risk taking and in many cases their risk controls are better than those of investment banks, according to the European Central Bank.

The ECB, in its six-monthly financial stability report published last night, said: "For the largest and most sophisticated hedge funds, risk management capabilities are comparable to those of the proprietary trading desks of global investment banks. In cases of co-investment of capital by hedge fund managers, a better alignment of their incentives with those of their investors may have kept a lid on their risk-taking."