No hedge fund firm is big enough to be deemed "systemically important" and to require special regulatory oversight, a leading group for the hedge fund industry said on Thursday.
The Alternative Investment Management Association (AIMA) urged the government’s Financial Stability Oversight Council not to designate any hedge fund firms as systemically important financial institutions, which would subject them to increased scrutiny by the Federal Reserve.
"We believe that no single hedge fund firm today is sufficiently large, leveraged, complex or interconnected that its failure or financial stress would cause a market disruption sufficient to destabilize the financial system," said Todd Groome, chairman of the AIMA.
The FSOC, which was created by Dodd-Frank, has yet to clarify which non-bank financial companies should be designated as systemically important.
Groome pointed out that the United Kingdom’s Financial Services Authority has already stated that none of the hedge funds it examined posed a significant systemic risk to the financial system.
During the financial crisis of 2008, more than 1,400 individual hedge funds closed or were liquidated, according to the AIMA. The group claims those closures had virtually no impact on the funds’ counterparties or on the stability of the system as a whole.
"The 2008 experience shows that hedge funds are ‘safe to fail,’ even if they are not fail-safe," Groome said.
Since hedge funds tend to be contrarian, they enhance the diversity of market behavior and actually contribute to financial stability, Groome added.
The London-based AIMA represents more than a thousand hedge fund firms worldwide.
