The Financial Services Authority has given hedge funds a clean bill of health in its latest report

The FSA found in its Hedge Funds as Counterparties Survey (HFACS) that major hedge funds did not pose a potentially destabilising credit counterparty risk across surveyed banks. Its concomitant Hedge Fund Survey (HFS) also found a low level of leverage and suggested a contained level of risk from hedge funds. Data for both surveys is from October 31, 2009.

“The results from this survey work were mostly in line with our expectations,” the FSA said in a report published February 23 entitled Assessing possible sources of systemic risk from hedge funds. “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.”

The FSA plans to publish the reports on a semi-annual basis. It is seeking to build a time series of data that will help to monitor trends in hedge funds as they relate to systemic risk.

Commenting on the FSA report, the Association for Financial Markets in Europe said: "This survey builds on the work on which AFME and the regulator have been collaborating for the past five years. It has contributed to international regulatory understanding of the issues. The data, which firms provide voluntarily, demonstrate the commitment of prime brokers and major hedge funds to be transparent in their dealings and should help silence the unjustified criticism that they are a destabilising factor in the markets.”

To access the FSA report please click here: http://www.fsa.gov.uk/pubs/other/hedge_funds.pdf