Hedge Funds Systemic Risk

Hedge Funds Fight Accusations of Posing "Systemic Risk"

Politicians and regulators hoping to reduce the threat of another financial crisis have often looked to "systemic threats," areas that could harm the entire financial system. Hedge funds are almost always lumped into this category but the Managed Fund Association is fighting this charge. The US House regulatory overhaul would require hedge funds managing more than $10 billion to contribute to a fund to rescue "too-big-to-fail" firms. In a letter to the House Financial Services Chairman Barney Frank, the Managed Fund Association argued against labeling hedge funds as a systemic risk and unnecessarily fining them.

“The bill now perversely singles out hedge funds for more onerous treatment without any articulated policy rationale,” association President Richard Baker, a former Republican congressman from Louisiana, wrote in the letter. “We are troubled by this.”

Frank’s committee is set to vote tomorrow on the systemic- risk legislation, part of Congress’s overhaul of financial rules in the wake of the credit crisis and last year’s $700 billion Wall Street rescue. The measure would shift the costs for resolving firms away from taxpayers who paid for the banking bailout.

The provision singling out hedge funds was approved by the committee on Nov. 19 as part of an amendment introduced by Representative Brad Sherman, a California Democrat. It isn’t likely to be stripped from the bill in committee, so the hedge fund lobby will have to fight the measure either on the House floor or when it is reconciled with Senate legislation. Source

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