AIMA urges FSB to exclude credit hedge funds from shadow banking debate

Date: Tuesday, March 6, 2012
Author: Owen Dickson, COO Connect

Credit hedge funds should not be considered part of the shadow banking sector, according to a paper by AIMA, the hedge fund industry body.

The paper argues credit hedge funds unlike banks and other non-bank financial institutions do not take deposits nor do they offer daily liquidity. Furthermore, it argues they do not “hold themselves out as guaranteeing the return of the invested principal.”  Most importantly, hedge funds have not and will not be bailed out by taxpayers.

“Hedge fund managers are subjected to stringent regulation already. And under Dodd-Frank and AIMFD, hedge funds are increasingly going to be monitored very carefully. The alternatives industry is certainly not in the shadows and should not be in the Financial Stability Board’s (FSB) sights,” said one industry source.

In November 2010, the G20 mandated the FSB to develop recommendations to strengthen the oversight and regulation of the shadow banking system. However, there is continued debate about what constitutes a shadow bank.  Recent G20 communiqués have referred to credit hedge funds, money market funds, securitisation, sec lending and repo activities as being part of the shadow banking system.

The industry source said that it was important to engage with international regulators. “There is a lot of confusion about what exactly a shadow bank is and it is important to explain that hedge funds do not engage in bank-like activities and are not in the shadows, so they do not belong in this debate,” said the source.