Two new surveys of hedge funds conclude that they currently pose relatively limited risks to overall financial stability.
The UK Financial Services Authority has released a report on its latest surveys of hedge funds and hedge fund conterparties, which were carried out in March and April respectively. The survey of funds themselves concludes that “risks to financial stability through the ‘market’ channel are limited at the time of the latest survey.”
It notes that total size of funds it surveyed remains modest in most markets, and leverage is largely unchanged for most funds. Funds also continue to report a strong ability to manage the liquidity of their assets and liabilities in aggregate, it says. However, it cautions that these reports are based on self-assessment and says “it is difficult to gauge whether these measures would hold during stressed market periods”.
“Risks to hedge funds remain from a sudden withdrawal of funding (such as financing from prime brokers and margin calls on derivatives trading), resulting in forced asset sales. This is of particular concern if funds have significant footprints,” it says.
As for the counterparty survey, the FSA reports that its results indicate that counterparties have increased margining requirements and tightened other conditions on their exposures to hedge funds since the financial crisis. “This suggests an increase in banks’ resilience to hedge fund defaults. However, if a sudden withdrawal of funding was to occur in one highly leveraged fund or across a number of funds, this may result in forced asset sales that exacerbate pressure on market liquidity and efficient pricing,” it says.