FCA publishes hedge fund survey

Operational Risk
02 Jun, 2015

Concentration risk at UK hedge funds remains high with the 10 largest firms controlling 38 per-cent of Assets under Management (AuM), according to the latest Hedge Fund Survey conducted by the UK’s Financial Conduct Authority (FCA). 

This comes as institutional investors such as pension funds increasingly allocate to the asset class. Many pension funds have strict risk mandates forcing them to invest in only the largest hedge funds. The FCA study said institutional investors accounted for 43 per-cent of new money flowing into hedge funds. A study by Towers Watson in 2014 found that a third of the top 100 alternative asset managers’ AuM was derived from pension funds. This comes as a growing number of pension funds struggle to meet increasing liabilities and rising deficits, and this is forcing them to disinvest from bonds and allocate into alternatives.

However, the risk of one of these major managers failing does present a risk for these institutional investors.  Hedge funds have recorded impressive growth over 2015 with the asset class encroaching towards the $3 trillion mark, according to data from the Chicago-based Hedge Fund Research. Credit Suisse’s Annual Hedge Fund Investor Survey in 2015 said allocators anticipated hedge fund AuM would grow by 14.4 per-cent thereby bringing industry assets to over $3 trillion for the first time.

Concentration risk is also evident in other areas, added the FCA study. It found 10 firms accounted for 87 per-cent of all interest rate exposures, 70 per-cent of all open positions and 87 per-cent of all turnover across all instruments. It also found just 10 firms were responsible for 76 per-cent of financial borrowing and 91 per-cent of repo borrowing, and 95 per-cent of the counterparty risk to the banks.

The survey also said the bulk of hedge funds obtain leverage through synthetics with interest rates being the key source of synthetic leverage. Financial leverage has reduced with 20 per-cent of funds having no financial leverage. The predominant approach is towards secured and collateralised borrowing, with less than 10 per-cent of funds using unsecured borrowing.

The overall term structure of financial borrowing has slightly improved since March 2014, with only 60 per-cent of the funds exposed to having their funds withdrawn within 1 to 30 days. Repo and reverse repo transactions dominate financial borrowings, and remain the preferred tool by macro funds. Their aggregate term structure is generally short and usually less than 30 days.



Credit Suisse