FSA Hedge Fund Report

FSA Finds Hedge Funds Don't Pose Destabilizing Risk

Here's some good news for hedge funds battling regulation in Europe: the Financial Services Authority (FSA) has released a report which finds that hedge funds do not present a "destabilizing risk."  This runs counter to many claims made by those pushing for tougher regulation of the industry.  The study found that no UK hedge funds borrowed $500 million from one bank without collateral and that hedge funds tend to borrow from multiple banks, so a single bank is not too vulnerable.  FSA is Britain's financial regulator and so the report has more weight than a financial firm's assessment.

The 50 largest hedge fund firms operating in the U.K. had borrowings of about double their $300 billion of assets under management, according to an October 2009 survey released by the Financial Services Authority today. The study showed that no hedge fund borrowed more than $500 million from a single bank without collateral. The biggest hedge fund questioned had about $1 billion of credit spread across a number of banks.

“Major hedge funds did not pose a potentially destabilizing credit counterparty risk,” the FSA said. “Data shows a relative low level of ‘leverage’ under our various measures.”

The British regulator has instead moved to place the onus on hedge funds’ counterparties to guard against extra risk. Banks will have to find an extra 29 billion pounds ($45 billion) to protect their trading books against potential losses, the FSA proposed in December.
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