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FSA survey concludes “major hedge funds did not pose a potentially destabilising credit counterparty risk to banks”

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The UK’s Financial Services Authority has released the results of its latest (October 2009) Hedge Funds Survey (HFS), which covers FSA-authorised managers with over USD300bn of hedge fund assets under management, representing approximately 20 per cent of the global industry.


The HFS asked 50 of the largest FSA-authorised investment managers about the hedge fund assets they manage and about the larger individual hedge funds for which they undertake management activities. These assets were distributed between a number of strategy types with Multistrategy, Global Macro, Managed Futures and Equity Long/Short accounting for 83% of the total. Some 85% of surveyed assets were domiciled in ‘traditional’ offshore centres.
The HFS was introduced in October 2009 to complement the FSA’s Hedge Funds as Counterparties Survey (HFACS), which has been running semi-annually for five years. The HFACS covers some of the largest FSA-authorised banks with exposures to hedge funds about their associated credit counterparty risks.
The main objectives of the HFS are to help the FSA better understand:
  • managers’ and larger funds’ use of leverage, whether through borrowing or derivatives;
  • managers’ and larger funds’ ‘footprints’ in various asset classes, including concentration and liquidity issues;
  • the scale of any larger funds’ asset/liability mismatch; and
  • the credit counterparty risks of larger funds.
This means that the HFS mainly focuses on the market channel for the potential systemic risks posed by hedge funds.
Summarising the results of the latest HFS, the FSA states, “The results from this survey work were mostly in line with our expectations. The HFACS data suggests that on 31 October 2009 major hedge funds did not pose a potentially destabilising credit counterparty risk across the surveyed banks. HFS data shows a relatively low level of ‘leverage’ under our various measures and suggests a contained level of risk from hedge funds at that time.
“While our analysis revealed no clear evidence to suggest that, from the banks and hedge fund managers surveyed, any individual fund posed a significant systemic risk to the financial system at the time, this position could change and future surveys will be an important tool in identifying emerging risks.
“It is also notable that the Alternative Investment Fund Managers Directive, which is currently under negotiation in Europe, may at some point in the future require national supervisory authorities such as the FSA to collect certain data from alternative investment fund management sectors, including hedge funds. We hope that our work in this area can contribute to the ongoing debate about the Directive.”
The FSA’s intention is to repeat these surveys at six monthly intervals and build a time series of data that will help it monitor trends in hedge funds as they relate to systemic risk. Discussions are taking place within the Financial Stability Board and IOSCO to ensure consistency in the timing and content of systemic risk data collection for hedge funds and the FSA believes its work will help inform that process. It concludes: “A consistent and proportionate global approach will help deliver G20 commitments of better coordination between regulators and, through improved data sharing, the clearer identification of global risks.”


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