Some hedge funds may be too big to fail, after all.
The Financial Stability Board, which includes regulators and central bankers from Group of 20 nations, said yesterday that investment funds with more than $100 billion in assets, or hedge funds with trading activities in excess of $400 billion to $600 billion, could be deemed systemically important. The decision contradicts a recent U.S. Treasury Department analysis that found hedge funds are not as risky as initially thought, but is in line with new Bank of England Governor—and FSB Chairman—Mark Carney's concerns that hedge funds could be a source of instability.
The FSB has been compiling a list of systemically-important banks and insurance companies, and is now turning its sights on other financial institutions, which Carney said "are integral to solving the problem of financial institutions that are too big to fail."
Hedge funds with high-enough trading activities will be assessed by national regulators, the FSB said. The group added that measures to lessen risks posed by systemically-important institutions "will be taken at a later stage."
The hedge fund industry has long balked at the idea that any single hedge fund could put the global financial system at risk. Industry groups have cited the 2008 financial crisis, which saw more than 1,400 hedge funds close without impact on counterparties' stability.