The embattled hedge fund industry received a boost from a surprising source yesterday after the Financial Services Authority argued that they do not pose a dangerous risk to banks that lend to them.
As European policymakers prepare for a crackdown, the FSA's research further downplayed the sector's influence in share trading, saying that the top 50 funds collectively control less than 1 per cent of the combined European stock market.
Politicians in Europe have for years accused the funds of having a malign influence in stock trading, particularly when it comes to the shares of companies involved in takeover situations.
The 50 funds surveyed by the watchdog represent around $300bn (£194bn) between them – about a fifth of the world's total hedge fund assets. They included large American groups with London operations, along with firms based in the UK.
London, despite recent tax rises, remains the dominant centre for the European hedge fund industry, with around 85 per cent of the market.
The FSA said it found that hedge funds are using a relatively low amount of borrowing compared to their net capital. This leverage stands at about 202 per cent. Of the 14 banks acting as prime brokers to hedge funds, the watchdog said that the maximum potential exposure to any one fund was $500m – a painful enough hit for a bank to take, but one which most banks should be able to handle.
The survey is now to be repeated every six months. "While our analysis revealed no clear evidence to suggest that, from the banks and hedge fund managers surveyed, any individual fund posed a significant systemic risk to the financial system at the time, this position could change, and future surveys will be an important tool in identifying emerging risks," the FSA said.
The regulator said it was possible that the Alternative Investment Fund Managers Directive, currently the subject of negotiation in Europe, could require more data to be collected from the hedge fund sector as well as private equity and other asset managers.Reuse content