Hedge Funds Don't Pose Systemic Risk, Hedge Fund Group Asserts

Even as hedge fund assets grew at a record-breaking pace last quarter, no firm is so big that its failure would pose a threat to the financial system, a hedge fund trade group asserts.

The comment comes after two regulators -- the Securities and Exchange Commission and the Commodity Futures Trading Commission -- proposed new rules that would require advisers to hedge funds to regularly disclose financial information to a government watchdog. More than two years after the near-failure of widely interconnected financial firms prompted a taxpayer bailout, many of these firms are larger than ever.

But this danger doesn't apply to hedge funds, the trade group said.

"I don't believe there is a firm that would be systemically relevant today," Richard Baker, president of the hedge fund industry group Managed Funds Association, told the New York Times.

The issue of "systemic risk," the phenomenon of a firm's being so large or interconnected that its failure would take down the system, was graphically displayed in the fall of 2008, when the U.S. government gave the financial industry a more than $700 billion taxpayer rescue. While hedge funds were not direct recipients of the bailout, they remain a key component of the financial system, managing trillions in assets.

Baker defended the way hedge funds do business, saying transparency is already a central tenet.

"Hedge funds are the last corner of financial free market enterprise," he said, according to the NYT.

Even in the wake of the financial crisis, hedge fund growth has broken records. In the fourth quarter of last year, hedge fund assets grew by a record $149 billion, Reuters reported this month. The global industry now manages more than $1.9 trillion.

John Paulson, the hedge fund manager who made billions betting against the housing market, reportedly earned roughly $5 billion last year, logging not only a personal best but also a record for the industry. His firm, Paulson & Co., manages $35.9 billion in assets, according to Bloomberg News.

A decade before the government bailout of the financial system, Wall Street banks pooled their resources to bail out Long-Term Capital Management, a fund on the verge of failure. If the firm had gone under, banks would have been exposed to "tremendous -- and untenable -- risks," writes Roger Lowenstein in the book When Genius Failed. "Undoubtedly, there would be a frenzy, as every bank rushed to escape its now one-sided obligations."

Comments

[DFWMoneyCoach]

09:14 PM on 02/01/2011

Raise interest rates and hedge fund abuses will disappear.....their growth and attendant systemic risk is due to negative interest rates. As long as money is free these abuses will continue. We should also require the Fed to sell off all of its assets. It has the ability to print money....there is no reason to allow it to acquire any other assets, We are encouraging these self important fools (Fed) to selectively bail out failed business models. How do we ever improve the economy when zombies are propped up by the government?

[Raccoon1]

07:02 PM on 02/01/2011

What would we expect them to say?

[halfpricefaustian]

03:53 PM on 02/01/2011

Transparency is a central tenet? Since when? Certainly not in the runup to the crisis, and they managed to get enough loopholes put into the financial reform their operations can remain safely secret.

[Whigist]

01:59 PM on 02/01/2011

Hedge funds did not cause the crisis or need bailouts, banks were part of the cause of the crisis and needed bailouts.......

So...why are the regulators distracting the public from the real issue of having more robust regulation of the banks?

[Captain Hindsight]

01:17 PM on 02/01/2011

It's Gabling not investing so it should be taxed like gambling is. You only get to offset your winnings by the amount of losses and only for the current year. Winnings should taxed as income not capital gains. Fees for moving the money around for others should also be taxed as income.

[blueken]

11:49 AM on 02/01/2011

Hedge fund managers use math that was developed by Nobel Prize winner John Nash to predict chaotic systems. Even Nash says that the math works with a number of un-known variables, until one more vairable is added, then it doesn't. The problem is knowing when that one more variable has been added. Hedge funds basicly take money from investors and use it as leverage to borrow even more money. Many multiples of what they have. They then use Nash's formula to place bets on both sides of the table. They shift bets according to the formula. This gives them enormous power to move markets. That power earns lots of money. Until it doesn't. That's the problem. Knowing when to stop.

[blindhammer]

12:12 PM on 02/02/2011

You've just described the US banking system as well.

[ibsteve2u]

10:46 AM on 02/01/2011

lolllll....they're not, of course, including the looting of your 401Ks and IRAs in their definition of "systemic".

Transferring your life savings to themselves is their business. Now if ya'll would just cooperate and put the Social Security Trust Fund within their reach...

[humanbeing-rick]

10:06 AM on 02/01/2011

As long as hedge fund managers continue to skim profits off the top of other people's money, and pay a fraction of the earned income taxes that the rest of society has to pay - there is a systemic risk. Their very existence is a systemic risk, as they are currently defined.

[Peter Noble 2]

10:22 AM on 02/01/2011

Thank you for saving me the time. You know who helped protect Hedge Fund Managers 15% tax rate? Senator Chuck Schumer a real Liberal: not.

[Raccoon1]

10:02 AM on 02/01/2011

Any private entity that controls tens of billions is too large and too powerful.

[not going2take it]

09:49 AM on 02/01/2011

DO AWAY WITH HEDGE FUNDS...

their entire nature is based on big lies.
designed to make rich people richer
while limiting their collective risk...

...grumble...

[amanda mariee]

09:34 AM on 02/01/2011

Deja vu... Capital Reserves!

[Peter007]

09:29 AM on 02/01/2011

Most money managers used to work for large Investment houses and mutual funds.
New advancements in technology allowed these managers to walk across the street and open up their own office and keep their profits rather than sharing it with their old bosses that rented expensive office space. Nothing has changed except instead of having 10 big investment houses and 30 small companies, we now have 3 Big firms and 1500 small firms.
Hedge funds just means a money management company.

[blueken]

12:08 PM on 02/01/2011

There is a big difference between the big three and the 1500 small firms. In the big firms there book keeping is too complicated for the SEC to understand so they really can't regulate them. Now the SEC doesn't have enough auditors to keep track of 1500 small firms. See the difference? Big firms, too complicated, small firms, too many of them. SEC, powerless. Nice.......

[floodmfx]

08:01 AM on 02/01/2011

Sure, we can trust them.
And we should buy that bridge they are selling too.

[Longtimeliberal]

06:54 AM on 02/01/2011

These guys just don't get it. They are the ones people are really mad at. The Wall St financial reform is supposed to regulate them but if Republicans have their way we will go back to the way we were.

[arlandbaee]

03:04 AM on 02/01/2011

John Paulson again at the center of things.