Published: 2nd March 2011

The FSA has published the findings from the latest Hedge Fund Survey (HFS) and Hedge Fund as Counterparty Survey (HFACS). As will be known from earlier Regulatory Roundups e.g. issue 9, the FSA carry out these surveys every six months or so in order to analyse the systemic risk posed by hedge funds.

The HFS took in around 50 investment managers with just over 100 ‘qualifying funds’ (QFs – for the purposes of the survey these are hedge funds with NAV of US$500m+) whilst the HFACS covered 14 large FSA-authorised banks which have significant dealings with hedge funds. The FSA believe that the HFS will capture around 20% of the global hedge fund industry AUM.

The report shows that QFs produced average returns of 2%for the six months to end of September 2010 (vs. – 0.6% return of the MSCI World equity index) with around 75%of funds reporting positive returns.

Hedge funds report a high level of portfolio liquidity with an estimated 55% of aggregate portfolios capable of being liquidated in less than 5 days – although the FSA throw in some caveats including the possibility of market liquidity deteriorating significantly in a stressed market environment. The footprint of hedge funds (being the sum of long market value and short market value) remains generally low, although the firms surveyed are estimated to hold approximately 8% of the outstanding value of the global convertible bond market.

On the negatives hedge funds’ counterparty exposures remain concentrated with five banks accounting for 60% of aggregate net credit counterparty exposure. By contrast the banks’ exposures are relatively small with an average exposure of less than US$50m.

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