28 Feb 2011
The Financial Services Authority has issued its key findings of the September 2010 survey on assessing the possible sources of systemic risk from hedge funds.
Key conclusions include:
The survey work highlights the importance of regularly collecting such data from hedge fund managers and their counterparties. It informs our supervisory work and allows for a better understanding of any systemic risks that might arise through the activities of hedge funds. In particular, building a time series of data should provide us with a valuable insight into the changing nature of these activities and help us to identify whether risks are emerging.
The FSA expects to repeat this survey work in March 2011. It will also continue to work closely with the International Organisation of Securities Commissions (IOSCO) and other national regulators to ensure that a clearer identification of global risks can be achieved through a consistent and proportionate global approach to systemic risk data.
To access the full survey click here.
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Key conclusions include:
- Most surveyed hedge funds had positive returns over the survey period. Assets below their high-water mark declined, enhancing the sustainability of the sector.
- The footprint of surveyed hedge funds within markets is generally small when measured by the value of their holdings, suggesting that in aggregate they do not have a major presence in most markets. Convertible bonds, interest rate and commodity derivatives are potential exceptions.
- Leverage has not changed significantly relative to previous surveys. Understanding leverage and the source of borrowings is one of the keys to assessing systemic risk.
- Hedge funds have ‘pushed out’ their financing terms recently. But the risk of a sudden withdrawal of liabilities during stressed markets (particularly financing) is likely to remain with an associated risk of fire sales of assets.
- Despite some signs of change, counterparty credit exposures to hedge funds remain concentrated amongst a small number of banks. Aside from the apparent extension of average maturities, banks appear to have tightened financing terms for hedge funds post-crisis, increasing their resilience to hedge fund defaults.
The survey work highlights the importance of regularly collecting such data from hedge fund managers and their counterparties. It informs our supervisory work and allows for a better understanding of any systemic risks that might arise through the activities of hedge funds. In particular, building a time series of data should provide us with a valuable insight into the changing nature of these activities and help us to identify whether risks are emerging.
The FSA expects to repeat this survey work in March 2011. It will also continue to work closely with the International Organisation of Securities Commissions (IOSCO) and other national regulators to ensure that a clearer identification of global risks can be achieved through a consistent and proportionate global approach to systemic risk data.
To access the full survey click here.
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