Posted on Monday, February 7, 2011
Even as hedge fund assets grew at a record-breaking pace last quarter, no firm is so big that its failure would pose a threat to the financial system, a hedge fund trade group asserts.
The comment comes after two regulators -- the Securities and Exchange Commission and the Commodity Futures Trading Commission -- proposed new rules that would require advisers to hedge funds to regularly disclose financial information to a government watchdog. More than two years after the near-failure of widely interconnected financial firms prompted a taxpayer bailout, many of these firms are larger than ever.
But this danger doesn't apply to hedge funds, the trade group said.
"I don't believe there is a firm that would be systemically relevant today," Richard Baker, president of the hedge fund industry group Managed Funds Association, told the New York Times.
The issue of "systemic risk," the phenomenon of a firm's being so large or interconnected that its failure would take down the system, was graphically displayed in the fall of 2008, when the U.S. government gave the financial industry a more than $700 billion taxpayer rescue. While hedge funds were not direct recipients of the bailout, they remain a key component of the financial system, managing trillions in assets.
Baker defended the way hedge funds do business, saying transparency is already a central tenet.
"Hedge funds are the last corner of financial free market enterprise," he said, according to the NYT.
Even in the wake of the financial crisis, hedge fund growth has broken records. In the fourth quarter of last year, hedge fund assets grew by a record $149 billion, Reuters reported this month. The global industry now manages more than $1.9 trillion.
John Paulson, the hedge fund manager who made billions betting against the housing market, reportedly earned roughly $5 billion last year, logging not only a personal best but also a record for the industry. His firm, Paulson & Co., manages $35.9 billion in assets, according to Bloomberg News.
A decade before the government bailout of the financial system, Wall Street banks pooled their resources to bail out Long-Term Capital Management, a fund on the verge of failure. If the firm had gone under, banks would have been exposed to "tremendous -- and untenable -- risks," writes Roger Lowenstein in the book When Genius Failed. "Undoubtedly, there would be a frenzy, as every bank rushed to escape its now one-sided obligations
The Huffington Post William Alden