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FSB issues hedge fund synthetic leverage warning

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The Financial Stability Board (FSB) has warned that some hedge funds now have “very high levels of synthetic leverage”, debt created by the use of derivatives or other financial instruments that frequently does not show up on balance sheets, according to a report by Reuters.

THE FSB, the G20’s risk watchdog, also noted that significant data gaps mean it is difficult to establish a full picture of”non bank” vulnerabilities.

According to a report by the FSB, many of the underlying flaws seen in non-bank financial institutions (NBFI) during the Covid-19 pandemic in March 2020 that forced central banks to inject liquidity into markets are still largely in place.

“Limits on data collection and disclosure mean that certain aspects of NBFI leverage can be hidden,” the FSB said. “Within the hedge fund sector, there is a group of funds, typically pursuing macro and relative-value strategies, with very high levels of synthetic leverage.”

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