FSA Report Says Hedge Funds Pose 'Limited' Risk

Aug 21 2012 | 1:04pm ET

Britain's financial regulator called into question the very basis of the European Union's impending hedge fund regulations in a report that shows that the industry poses little risk to the global financial system.

The Financial Services Authority survey found that hedge funds have a "strong ability to manage the liquidity of their assets and liabilities." Combined with counterparties' "increased margining requirements and tightened other conditions on their exposures to hedge funds since the financial crisis," this has blunted the risk to financial stability.

The EU and its constituent financial regulators are poised to force hedge funds to register, increase their disclosures, cut leverage and restrict bonus payments to employees.

The FSA did admit that its conclusions were based on self-assessments by hedge fund managers, and that limited risk and no risk are not the same thing.

"Risks to hedge funds remain from a sudden withdrawal of funding, resulting in forced asset sales," the FSA said. "This is of particular concern if funds have significant footprints." And "repo borrowing may be a particular risk as it has to be continually rolled, and this may be difficult for hedge funds to achieve during stressed market conditions."

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