MFA Blog

MFA Responds to FSOC Request for Comment on Asset Management Products and Activities

Posted on March 25, 2015

The Managed Funds Association (MFA) today submitted comments to the Financial Stability Oversight Council’s (FSOC) request for information about the role asset managers play in our financial markets. In its letter, MFA states that any risks associated with asset management that could pose threats to the system are best addressed on a structural, market-wide basis, not by narrow targeting of individual funds or activities that do not pose systemic threats.

MFA addressed activities FSOC identified that could create market risks. Many of those activities, MFA explains, are utilized by all capital markets participants – asset managers, investment funds, financial institutions, pension plans, and other investors. We do not believe that any of the risks identified by the FSOC rises to the level of systemic risk to the U.S. financial system.

The relatively small size, moderate leverage, careful management of redemptions, and financing provisions make the hedge fund industry and its individual members improbable sources of systemic instability in the U.S. financial system. Furthermore, while no hedge fund closure threatened the broader financial system during the financial crisis, regulations implemented and market practices adopted since the financial crisis further mitigate the risk that the liquidation of assets by one or more hedge funds, even in periods of market stress, could have widespread impact on the financial system or cause any significant harm to hedge funds’ counterparties.

MFA’s comments specifically address several topics of importance to FSOC’s analysis, including leverage ratios, borrowing, regulatory oversight, transparency and liquidity.

Compared to most of the financial services sector, hedge funds individually and collectively are relatively small actors. During the peak of the global financial crisis, many hedge funds were forced to liquidate their assets, yet not a single hedge fund required a bailout. That is because the global hedge fund industry is less concentrated than other parts of the financial industry.

In addition, hedge funds’ borrowings are usually fully backed with collateral, which is why the hedge fund industry has leverage ratios considerably less than those of banks and insurance companies.

The hedge fund industry is also subject to regulatory oversight by a number of international regulators. Large hedge fund managers are required to register with and provide extensive reporting to the SEC, and usually to the CFTC and the UK’s Financial Conduct Authority, among others. Hedge funds are similarly subject to rigorous market-based rules which were enhanced by the Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S. as well as the Alternative Investment Fund Managers Directive, the European Market Infrastructure Regulation, and the Markets in Financial Instruments Directive in the EU.

Many of these reasons led then Federal Reserve Chairman Ben Bernanke to testify in 2009 before Congress that he did not believe, “any hedge fund or private equity fund would become a systemically critical firm individually.” In its response to the FSOC, MFA builds on that statement and proves the same could be said of the entire global hedge fund industry.

To view a fact sheet on Hedge Funds’ Role in the U.S. Financial System click here.

To view MFA’s Letter to FSOC click here.