With some 300 fund managers, traders and administrators in the Managed Fund Association audience, Anthony W. Ryan, assistant secretary of the U.S. Department of Treasury for financial markets gave a warning: with $1.4 trillion in assets under management in the hedge fund community, managers need to be vigilant to avoid any actions that could cause a “systemic event.”
Ryan, a former fund manager who joined the Treasury department last December, noted that the President’s Working Group missive release last February came to the conclusion that “stakeholders,” which include fund managers, lenders and counter parties, all those who manage private pools of capital, need strong market discipline, and that mixed with regulatory policy can reduce the chance of a systemic event.
He noted that a “perfect storm” for an event could include a situation that allowed easy credit, highly correlated strategies, connected lenders, inadequate information and undeveloped markets.
“Seeing the rise in correlation of hedge fund strategies today” needs to make all managers more vigilant of their discipline, he said. He did say the distribution and number of vehicles today does mitigate some risk, but he believes the assessment of risk today is “anywhere but close to adequate.”
He noted that financial institutions need to have appropriate credit terms, need to do independent and self assessments regularly, must maintain best risk management practices and lenders must measure exposure to mitigate any problems. “There needs to be regular stress testing,” he said.
“This is not an endorsement of status quo,” he warned. “Every set of stakeholders have work to do.”
Later when asked if he saw any regulations coming into play, he noted he couldn’t forcast what the legislators might do, but repeated that stakeholders need to be vigilant. One reason he thought the Amaranth Advisors failure, despite much larger in losses than Long -Term Capital Management, didn’t have the same impact was the wide distribution of risk in its portfolio.
Tags: Hedge funds, President's Working Group, regulation, systemic risk, U.S. Department of Treasury
