Hedge Funds Systematically Important
Hedge Funds May Avoid Direct Supervision by the Fed
The Financial Stability Oversight Council, a new financial watchdog composed of the Treasury Secretary and 14 U.S. supervisors including the Federal reserve, has set its sights on firms that could potentially harm the financial system. The Fed will directly scrutinize these firms deemed "systematically important" but the hedge fund industry may get a pass on the added layer of supervision. This is because the Council does not believe that any one hedge fund can topple the financial system. If that is true then hedge funds will have overcome at least one regulatory hurdle in a year of increased regulation activity worldwide.
The indication that hedge funds might escape this designation is sure to send a huge sigh of relief through the $1.7 trillion industry, which has long avoided the tighter controls imposed on mutual funds, for example.
In exchange for looser regulations, hedge fund firms promise to allow only wealthy and sophisticated investors like pension funds and endowments into their portfolios.
The Fed's view will carry considerable weight among the Financial Stability Oversight Council, which was created by the Dodd-Frank legislation to monitor risks to the financial system in the aftermath of the 2007-2009 credit crisis.
The source said the Fed does not think any one hedge fund can be "systemically important" but believes that information about the funds' positions could give the council insight into potential risks. The source requested anonymity while discussing talks held with the Fed. Source
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