On August 21, the UK Financial Services Authority (FSA) produced its latest half-yearly report Assessing Possible Sources of Systemic Risk from Hedge Funds. This sets out the results of the FSA’s latest (March/April 2012) performance of its two regular hedge fund surveys—the Hedge Funds As Counterparties Survey (HFACS) and the Hedge Funds Survey (HFS). The FSA conducts these surveys every six months to assist it in understanding potential sources of systemic risk in the hedge fund sector. This is the sixth HFS and the fifteenth HFACS as reported in the March 2, 2012, edition of Corporate and Financial Weekly Digest.
The August 21 report’s conclusions include the following:
- Aggregate assets under management increased in the survey period, predominantly due to positive returns, but also helped by generally positive net subscriptions. Aggregate assets below their high-water mark have remained stable and low.
- The footprint of surveyed hedge funds is modest when measured by the value of their exposures and by turnover. Potential exceptions remain the markets in convertible bonds, commodity derivatives and interest rate derivatives.
- In aggregate, hedge funds reported that they can liquidate their assets in a shorter time frame than when most of their liabilities fall due. Almost all surveyed funds reported the ability to suspend investor redemptions or create side pockets and over half reported that their investors had side letters. The risk of a sudden withdrawal of funding during stressed market periods is likely to remain, with an associated risk of forced asset sales.
- Counterparty credit exposures to hedge funds remain fairly concentrated among five counterparty banks. From the perspective of the banks, by tightening their financing terms they have increased their resilience to possible fund defaults.
- Leverage remains largely unchanged and modest for most hedge funds.
- For most surveyed funds, measures of portfolio concentration, including top ten positions as a percentage of gross market value and the number of open positions, has remained largely unchanged.
The FSA stated that it intends to repeat the HFS and HFACS in September/October 2012. It also intends to continue to work closely with the International Organization of Securities Commissions and other national regulators with a view to achieving a consistent and proportionate global approach to systemic risk data collection for hedge funds.