Assessing the possible sources of systemic risk from hedge funds - A report on the findings of the Hedge Fund Survey and Hedge Fund as Counterparty Survey
February 28, 2011
This paper sets out the results of the FSA's latest Hedge Fund Survey conducted in September 2010 and the Hedge Fund as Counterparty Survey conducted in October 2010.
In these surveys, the FSA analyses the systemic risk posed by hedge funds. They are conducted every six months as part of the FSA's work on assessing risks to financial stability from outside the boundary of prudential regulation. This is a key part of the FSA's work to protect and enhance the stability of the UK financial system.
Key findings from the survey:
- 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.
- 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.