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US regulator calls for greater scrutiny of hedge funds after bond turmoil

Hedge funds and different components of the shadow banking system ought to face better scrutiny after final month’s upheaval in US authorities bonds, the nation’s prime markets regulator has stated, reflecting considerations that speculative buyers pose a danger to monetary stability.

Gary Gensler, chair of the Securities and Trade Fee, instructed the Monetary Occasions that taming dangers from speculative funds and different so-called non-bank monetary establishments was now “extra necessary than ever”.

He added he needed a greater understanding of how bets by such asset managers — usually extremely leveraged — can spill out throughout asset courses and into the true economic system.

Gensler’s feedback sign regulators’ willpower to deal with dangers exterior the banking sector following a UK authorities bond disaster that contributed to the ejection of Liz Truss’s authorities final yr, and what the SEC chair termed as March’s “once-in-a-generation” rally in Treasuries.

“We simply had Treasury yields transfer extra considerably than they’d in 35 years in three days in mid-March,” he stated, referring to the rally sparked by the failure of Silicon Valley Financial institution. “When you’ve gotten that, it’s applicable as a capital markets regulator to speak to people and see whether or not that danger . . . propagates out.”

In addition to initiating such contacts, the SEC may also suggest forcing market individuals to extend disclosure of their actions.

However regulators have concentrated over the previous decade on the banks that helped spark the 2008 monetary disaster, largely leaving hedge funds alone — even after the 2021 collapse of Archegos, the hedge fund-style household workplace.

Within the meantime, property managed by hedge funds globally have greater than quadrupled to $4.8tn since 2009, in line with information supplier BarclayHedge.

Nonetheless, a number of heavy-hitting macro hedge funds suffered billions of {dollars} of paper losses when buyers moved in to bonds after SVB failed.

A pick-up in bond costs rapidly was the most important rally since 1987 as hedge funds rushed to shut out bets in opposition to Treasuries that had introduced them good-looking rewards final yr.

“Just a little bit of reports obtained vastly amplified” by the “speculative neighborhood”, Sushil Wadhwani, a former central banker and chief funding officer at PGIM Wadhwani, an asset supervisor, stated at an occasion this week.

A hedge fund supervisor instructed the FT he and a number of other friends had now acquired inquiries from regulators in search of data on their establishments’ positions in Treasuries — an important market that determines costs throughout world asset costs. Gensler declined to touch upon any particular requests to corporations.

One other hedge fund supervisor stated that leverage constructed up by shadow banks had been the main focus of latest conversations. They stated the regulator was “gathering market intelligence” on this reasonably than expressing particular considerations.

Gensler added that authorities shouldn’t be distracted from the dangers posed by non-banks by the failures of lenders resembling SVB and Credit score Suisse — a message echoed by different world regulators on the IMF spring conferences in Washington.

He stated he had beforehand recognized hedge funds as a danger to monetary stability, including that the SEC’s oversight, together with different regulators of financial institution lending to hedge funds, was “a very necessary focus of not simply ours however of others overseeing [the banking sector]”.

The SEC was in direct contact with market individuals and acquired quarterly experiences from hedge funds in addition to data from banks, Gensler stated.

The US regulator has put ahead proposals to offer it entry to extra real-time information in occasions of market stress. Final yr it additionally proposed steerage that might require hedge funds to tell it instantly once they have giant investor withdrawals or large losses.

Klaas Knot, chair of the Monetary Stability Board, a world alliance of regulators, final week additionally emphasised the deal with shadow banking.

The drive extends past hedge funds, since different non-bank establishments can exacerbate market volatility. Final yr’s disaster in UK authorities bonds was sparked off by specialist buyers serving pension funds.

Gensler stated latest inflows additionally strengthened the arguments for tighter regulation of cash market funds, which buyers have piled in to for shelter from chaos within the banking sector.

Further reporting by Harriet Agnew