An organization representing hedge funds says no one fund today should be designated a “systemically important financial institution” by regulatory authorities.
The Alternative Investment Management Association, which represents 1,250 members from all aspects of the industry, does not believe hedge funds should come under increased regulatory scrutiny.
“We believe that no single hedge fund firm today is sufficiently large, leveraged, complex or interconnected that its failure or financial stress would cause a market disruption sufficient to destabilise the financial system,” said AIMA Chairman Todd Groome.
AIMA issued its statement as the Financial Stability Oversight Council considers the criteria by which it will determine which non-bank financial companies may be deemed systemically important.
“We note that the UK’s Financial Services Authority has stated that, based on their risk reporting framework, none of the large hedge funds they have examined currently poses ‘a significant systemic risk to the financial system’. We also note that the FSA’s hedge fund survey has found that major hedge funds ‘did not pose a potentially destabilizing credit counterparty risk’, and that the levels of leverage employed were ‘relatively low’, which ‘suggests a contained level of risk’.”
Groome also points out that during 2008, over 1,400 individual hedge funds closed or were liquidated and those closures “had virtually no impact on hedge fund firms’ counterparties or the stability of the financial system at large."
“Hedge funds collectively represent a relatively small group of extremely heterogeneous and often very small businesses, and even their collective positions and exposures are not such that individual failures pose a risk to financial stability,” said Groome of the industry that comprises about 10,000 funds and $2 trillion in assets.
AIMA also stressed that hedge fund firms employ significantly lower levels of leverage than banks and some other financial institutions.
Said Groome, “The 2008 experience shows that hedge funds are ‘safe to fail’, even if they are not fail-safe.”