Hedge Fund Leverage

FSOC worried about leverage at hedge funds and mutual funds according to prepared remarks by Jack Lew.

This is not good for multistrat funds which tend to carry a decent amount of leverage.

As Bloomberg Notes:

The amount of borrowed money at big hedge funds is ringing alarm bells with Wall Street’s uber regulator, which made a new push to try to assess whether the $2.9 trillion industry could threaten the financial system.

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The decision could thrust firms such as Citadel LLC, Millennium Management, D.E. Shaw & Co. and Bridgewater Associates into the spotlight. Including leverage, the companies oversee a combined $654 billion, according to SEC filings.

 

As to leverage, we have not come to any conclusions yet that the use of leverage by private funds currently presents financial stability risks.  Overall, the use of leverage in the financial system has come down dramatically since the crisis, and in hedge funds, leverage does not appear high on average but, by several measures, leverage appears to be concentrated in large funds.  It does not, however, mean that risk is concentrated in these funds.  Greater leverage does not necessarily imply greater risk, or systemic risk, and many other factors need to be considered.  Individual regulators do not have a complete picture of the risks being taken, further complicating our ability to understand these issues.  Thus, the need for further analysis and information sharing is clear, which is why we plan to create a working group comprised of experts from the relevant Council agencies to address the questions identified by our initial review.  This is exactly the sort of exercise – bringing together data and expertise across the regulatory spectrum – that the Council is well-situated to lead.

Hedge Fund Leverage

Full statement from Lew here -> Link

Hedge Fund Leverage
Hedge Fund Leverage