The Financial Conduct Authority (FCA) will increase its regulatory oversight of the UK’s largest hedge funds. The city watchdog justified the additional scrutiny because the funds have grown sufficiently to command nearly 20 percent of the world’s hedge fund sector in 2013. In the early 2000s, Britain’s hedge funds managed 10 percent of this financial sector. Financial analysts estimate that the 20 largest UK hedge funds now manage 82 percent of the total hedge fund assets. FCA’s director of supervision, Clive Adamson, issued a statement that the regulatory agency will focus on the largest hedge fund companies that potentially create possible risks to the country’s financial system. The watchdog considers this as a vital matter in order to mitigate and identify systemic risk, Adamson said. Derivative exposure and leverage will be subjected to additional proactive monitoring, FCA stated.
The BofE governor, Mark Carney, recently raised the warning flag over “excessive risk-taking.” Carney stated that the bank is looking more closely at complacency and risk amongst the shadow bankers, meaning hedge fund firms. An initial study from the FCA indicates that hedge funds have increased their exposure to 64 times their management assets from a 54 ratio in March of 2013. This increased exposure has regulators concerned enough to trigger their authority to watch these firms more closely.
The hedge fund industry argues that the expansion rate amongst hedge funds is not disproportionate. While it’s true that hedge funds have grown larger, the amount of leverage they exert is far lower than other sectors in the financial system, said Jiri Kroll, who acts as an overseer at Aima, the lobby group for Britain’s hedge fund sector. Kroll insisted that the hedge fund industry passed the stress test caused by the financial crisis in 2008. Calling the crisis “the mother of all stress tests,” Kroll said that the hedge fund sector passed through the financial storm with flying colors. He pointed out that funds that failed were liquidated in a proper fashion that caused few harmful systemic events. In addition, no hedge fund firm required a taxpayer rescue.