Sun, Jan 22, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Asia Pacific Intelligence

Australian regulator says hedge funds do not pose systemic risk to financial system

Tuesday, October 01, 2013

Precy Dumlao, Opalesque Asia: Australian hedge funds do not currently pose a systemic risk to the local financial system, an ASIC report claimed and added that the country's hedge fund industry manages only a small share of Australia's $2.1tln managed funds industry with more than half of these holding less than $50m each.

In its survey of Australian hedge funds, it found that the local fund management space uses low leverage and appeared to have adequate liquidity to meet obligations.

In a speech by Australian Securities and Investments Commission (ASIC) Commissioner Greg Tanzer during the AIMA Australia Hedge Fund Forum today, he said that there are no Australian examples of hedge funds causing systemic risk, but there are overseas.

"The collapse of Long Term Capital Management (LTCM) in 1998, where the Federal Reserve Bank of New York had to orchestrate a bail - in by its investment bank counterparties is the most famous," Tanzer said. "This is an example of a hedge fund raising systemic risk through the channel of credit risk. Ten years later, Morgan Stanley faced the simultaneous blows of massive withdrawals of hedge fund assets from custody while having to satisfy contractual rights to provide uncollateralized loans to other hedge funds. This led to tri-party repo (repurchase agreement) lenders questioning its credit and to the firm applying to become a bank holding company," he added.

He told delegates of the conference that hedge funds may also contribute to systemic risk through the market risk channel, for example, where their activities lead to a liquidity problem or mispricing in a particular market for securities or futures.

Tanzer said, "Examples include the distorting impact of Amaranth Advisors' investing over the northern summer of 2006 in US natural gas futures for the 2006-07 winter, and the shorting and resulting short-squeeze of Volkswagen stock in 2008 which distorted the German equity indexes over several days."

ASIC's findings were based on 2010 and 2012 surveys undertaken in coordination with other
Members of the International Organization of Securities Commissions (IOSCO), which created a Task Force to consider the proper supervision of hedge funds and to monitor the systemic risk they may pose.

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 $19bn) 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 $8.2bn and $6.9bn 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.

The survey found that 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.

 
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
Asia Pacific Intelligence
Asia Pacific Intelligence
Asia Pacific Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - This hedge fund made 37% betting on banks in 2016 and remains bullish after the Trump rally, Hedge fund legend David Einhorn is making a big bet on GM, After impressive 85% return in 2016, hedge fund looks to Canadian gold producer, small banks[more]

    This hedge fund made 37% betting on banks in 2016 and remains bullish after the Trump rally From Forbes.com: Can bank stocks continue to rise after a 28% surge in the KBW Bank Index in 2016, fueled by a post-election rally as stock pickers returned to the beaten down sector? Forget the s

  2. SWFs - China sovereign wealth fund CIC plans more U.S. investments[more]

    From Reuters.com: China Investment Corporation (CIC), the country's sovereign wealth fund, is looking to raise alternative investments in the United States due to low returns in public markets, its chairman said on Monday. CIC will boost its investments in private equity and hedge funds as wel

  3. Some hedge funds strong start in 2017 nice contrast to 2016[more]

    With the 2016 HSBC Hedge Weekly performance rankings in the books - a year in which the same leader-board entries pretty much dominated unchallenged throughout the year - comes a new leader board that is a hard-scrabble mix of hedge fund styles and categories. What is clear after but a few short wee

  4. Macro hedge funds and CTAs outperform in December on strong dollar[more]

    Komfie Manalo, Opalesque Asia: The last month of 2016 saw risk assets climbing higher, as part of expectations that the new U.S. administration will remove barriers to growth and investment, Lyxor Asset Management said. December also saw the Fed hik

  5. Opalesque Exclusive: Roxbury credit events UCITS gathers more assets[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: The Roxbury Credit Events Fund, launched in September 2015, was up 4.24% in 2016, having returned seven positive months during the year. The managers raised