The US hedge fund industry will not be subject to a crash of any greater significance than what would be regarded as cyclical in most other ...

The US hedge fund industry will not be subject to a crash of any greater significance than what would be regarded as cyclical in most other markets, according to John Paulson, the founder of $5 billion fund, Paulson & Co, speaking at Reuters' Hedge Fund and Private Equity Summit in New York.

However, he made it clear that there is potential for highly leveraged funds to experience considerable drawdowns in the event of an economic shock.

Mr Paulson said another US recession could create problems at hedge funds. He mentioned the high trade deficit, weak US dollar, and very strong credit and real estate markets as key potential problem areas.

"Any of those areas, if [the economy] deflated, could result in a significant economic shock. They're looming problems that no one seems to be concerned about, but at some point, the hen will come home to roost," Mr Paulson told the summit.

"My own opinion is that we are in some type of credit bubble," he said. "I expect that some time in the next couple of years, that bubble will deflate.

"There will likely be periodic disruptions, as there are in all asset classes, and I think there probably will be another Long Term Capital Management down the road," Mr Paulson said, according to Reuters.