A UK survey in September of just over 100 hedge funds shows the funds continued to rely more on repurchase agreements for funding than any other type of borrowing, but their total repo borrowing was down slightly from six months earlier.
The hedge fund managers said they got roughly 53 percent of their funding from repo loans, down from 60 percent in April. Most of the collateral for the repo loans, 77 percent, was government bonds.
The survey noted that leverage at hedge funds was manageable and had not changed much from previous surveys.
From the report:
Repo borrowing may be a particular risk as it has to be continually rolled, especially if it is short term. The rolling over of repo borrowing may be difficult in a stressed market environment. The source of hedge funds’ borrowings continues to be an area of interest.
The other key ways that hedge funds borrowed was with synthetic instruments like swaps and with collateralized loans from broker-dealers, the report said.
The hedge funds mostly got their funding from banks, with just five banks accounting for more than 60 percent of the hedge funds’ borrowing, the survey found. Still, the maximum potential exposure of any one bank to any one hedge fund was less than $500 million.
The latest results suggest that the footprint of surveyed hedge funds remains small within most markets and leverage is largely unchanged, so that risks to financial stability through the market channel seem limited at the time of the latest surveys. In addition, counterparties have increased margin requirements and tightened other conditions on their exposures to hedge funds since the crisis, increasing their resilience to hedge fund defaults. Nevertheless, some risks to hedge funds remain, particularly if they are unable to manage a sudden withdrawal of liabilities during a crisis period, potentially resulting in forced asset sales. Forced asset sales during stressed market environments may exacerbate pressure on market liquidity and efficient pricing.
The biannual survey by the Financial Services Authority, which regulates all financial institutions in the UK, covers about 50 investment managers with just over 100 hedge funds and about $380 billion in assets under management. The authority estimates the survey captures about 20 percent of the global hedge fund industry.
The September 2010 survey was published in February 2011, titled “Assessing the possible sources of systemic risk from hedge funds.” The next biannual survey is being conducted in March.