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Hedge funds no systemic risk to financial system

Extract from ASIC website.

Hedge funds no systemic risk to financial system

Australian hedge funds do not currently pose a systemic risk to the Australian financial system, an ASIC report released today has found.

Key points:

  • Hedge funds ASIC identified manage only a small share of Australia’s $2.1 trillion managed funds industry with more than half of these holding less than $50 million each
  • The survey indicates Australian hedge funds do not currently appear to pose a systemic risk to the Australian financial system
  • Listed equities represent surveyed hedge fund managers’ greatest asset exposure, with 32% of this being in Australian-listed shares

Surveyed qualifying hedge funds also use low leverage and appear to have adequate liquidity to meet obligations

The survey was representative of the state of the Australian hedge fund industry as a whole, with the assets of the 12 surveyed qualifying hedge funds representing approximately 42% of the assets held by single-strategy hedge funds in Australia.

Australian wholesale investors are the main investors in the surveyed funds. Their hedge-fund investment relative to their total investments is minimal, which tends to reduce systemic impact of any problems in the sector.

By asset class, listed equities (over US$19 billion) are the surveyed fund managers’ greatest gross exposures, with almost one-third of this being Australian equities. Equity derivatives and G10 sovereign bonds are the next two most significant asset classes, with exposures of US$8.2 billion and US$6.9 billion respectively.

Hedge fund redemptions exceeded applications in 2012, compared with the substantial inflows in 2010. However, the 2012 redemptions are unlikely to result in liquidity pressures because the average redemption size is relatively small as a percentage of funds’ net asset value.

The average time in which surveyed funds can liquidate 92% of their portfolio is less than 30 days. However, creditors can demand 99% of fund liabilities in less than 30 days. If the Australian market were subject to significant stress, the sector may struggle to meet redemption requests. However, this risk is offset by all the surveyed funds being able to suspend redemptions, if required.

Surveyed funds use relatively low levels of leverage, with synthetic leverage being the largest source in 2012. Average leverage, by gross market value as a multiple of net asset value, increased from 1.25 times assets in 2010 to 1.51 times assets in 2012.

Hedge funds’ investments have in the past adversely affected the financial system by disrupting liquidity and pricing in markets (market channel risk) or by causing creditors to lose money (credit channel risk). The potential for systemic risk depends on the size, significance and interconnectedness of hedge funds.

In 2010 and 2012, the International Organization of Securities Commissions (IOSCO) called on members to survey their jurisdictions’ largest hedge fund managers to better understand the systemic risk these funds posed. In late 2012, ASIC surveyed hedge fund managers operating in Australia with more than US$500 million under management.


 

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