FSA Reports on Assessing Possible Sources of Systemic Risk from Hedge Funds

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On February 29, the UK Financial Services Authority (FSA) produced its latest biannual report Assessing Possible Sources of Systemic Risk from Hedge Funds. This report sets out the results of the FSA’s latest (September/October 2011) performance of its two regular hedge fund surveys: the Hedge Funds As Counterparties Survey (HFACS) and the Hedge Funds Survey (HFS). The FSA conducts these surveys every six months to assist it in understanding potential sources of systemic risk in the hedge fund sector. (For an article on the most recent previous HFS and HFACS, see the July 29, 2011 edition of Corporate and Financial Weekly Digest.)

The February 29 report's conclusions include the following:

• The footprint of surveyed hedge funds is generally small when measured by the value of their exposures and by turnover. Potential exceptions are the markets in convertible bonds, commodity derivatives and interest rate derivatives.

• In aggregate, hedge funds reported that they are able to liquidate their assets more quickly than when most of their liabilities fall due. Nearly all surveyed funds reported the ability to suspend investor redemptions or create side pockets. However, the risk of a sudden withdrawal of funding during stressed market periods is likely to remain, with an associated risk of fire sales of assets...

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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