AIMA Paper Indicates That Hedge Funds Are Replacing Banks as Credit Suppliers to Businesses (with Lofchie Comment)

The Alternative Investment Management Association ("AIMA") issued a paper titled "Financing the Economy: The Role of Alternative Asset Managers in the Non-Bank Lending Environment." The paper found that hedge funds and other alternative asset managers are "playing an increasingly important role in financing the economy," with private debt funds, such as hedge funds, now managing roughly $440 billion in assets.

According to the paper, the most popular borrowers of non-bank private debt are small and medium-sized enterprises that typically are too small to raise capital through the public corporate bond markets and have difficulty borrowing from the traditional banking sector. The appendix to the paper contains a number of case studies, including examples of private debt funds that have "supported sectors as diverse as social housing, health, renewable energy and shipbuilding."

Additionally, the paper found that private debt funds "typically use little or no leverage" and are structured in a way to prevent bank-style "runs" or other systemic problems.

Lofchie Comment: Interestingly, a spike in the number of bank capital requirements is forcing traditional lending activity out of banks and into private funds. Taking the costs of regulation into account, this seems to demonstrate that banks are not receiving a disproportionate amount of government subsidies, since they are having trouble competing with non-banks for lending business. Bank regulators assert that they should have regulatory authority over non-banks because their policies have effected successful competition between non-banks and regulated banks. Presumably, the bank regulators would force lending business back into banks by imposing bank-like regulatory burdens on non-banks.

See: "Financing the Economy: The Role of Alternative Asset Managers in the Non-Bank Lending Environment"; Executive Summary of Paper; AIMA Press Release.