WASHINGTON Dec 16 A preliminary analysis of a
new trove of hedge fund data has found that the industry may not
be as risky as conventionally thought, a U.S. Treasury
Department official said on Monday.
Richard Berner, director of the Treasury's new Office of
Financial Research, said the tentative conclusion is based on an
examination of hedge funds' leverage levels, risk modeling and
the amount of hard-to-value assets, among other factors.
The findings are important because the office's research may
influence policymakers' debate on which financial institutions
need to be more tightly regulated.
The office has new access to data on thousands of hedge
funds, after the 2010 Dodd-Frank Act required certain large
private funds to submit confidential information to regulators,
in an effort to help them better police for systemic risks.
"While these results are very preliminary, they seem to
contradict the idea that hedge funds typically employ risky
strategies," Berner told an audience at The Brookings
"I want to emphasize that these conclusions are very
tentative. They are based on a preliminary analysis of the data.
And one should really take them as the starting point for
further work," he added.
The office, also created by Dodd-Frank, did not formally
release information associated with its analysis.
The Managed Funds Association, representing mainly hedge
funds, welcomed Berner's comments.
"We appreciate the OFR's analysis of the ... data, which
largely confirms the history of data on hedge fund strategies
and their use of leverage, and tracks with MFA's view that hedge
funds currently do not pose a systemic risk," said Richard
Baker, president and chief executive of the MFA.
However, Berner on Monday stood by a report his office
produced earlier this year that upset mutual funds by finding
that certain activities by large asset managers could pose risks
to the broader marketplace.
The Sept. 30 study focused more on risks posed by highly
regulated mutual funds, but it did not contain data or analysis
on less-regulated hedge funds.
Berner said the prior report did not include such data
because regulators had recently started to collect information
and did not yet have a clean data set.
The research is expected to play a role in whether a U.S.
panel of regulators designates larger asset management firms
such as BlackRock or Fidelity as "systemic" - a tag that
requires firms to set aside more cash and face heightened
oversight by the Federal Reserve.
The Sept. 30 study concluded that risks are posed by the
activities of large firms, including the use of leverage to help
boost returns and "herding" behavior in which managers crowd
into the same or similar assets. Any financial shocks could then
trigger investors to rush for the exits, the report found. It
did not single out firms as particularly risky, although it did
provide data about specific firms.
"We stand by the report," Berner said on Monday, also noting
that it is not up to his office to decide whether firms
ultimately get designated.
Since the OFR's Sept. 30 report was released, it has been
widely panned by the industry and some members of Congress.
Critics say the report was poorly informed and fundamentally
misunderstood asset managers' business models and how they
differ from banks.
Privately, regulators at the Securities and Exchange
Commission, the agency that oversees asset managers, also
contested the report, Reuters previously reported, citing people
familiar with the matter.