Alternative Investment Management Association
02 March 2012
Credit hedge funds should not be considered part of the ‘shadow banking’ sector, according to a new paper by the Alternative Investment Management Association (AIMA), the global hedge fund trade association.
AIMA’s research paper* highlights crucial differences between the key functions of a traditional bank and those of credit hedge funds and other non-bank financial institutions.
Credit hedge funds do not take deposits, do not offer daily liquidity nor otherwise hold themselves out as guaranteeing the return of the invested principal.
They manage their liquidity profiles by agreeing investor redemption terms which correspond to the liquidity profile of the underlying investments. They therefore do not engage in significant maturity transformation.
Crucially, hedge funds do not benefit from implicit or explicit taxpayer guarantees.
Andrew Baker, AIMA CEO, said: “Credit hedge funds – and hedge funds in general - do not operate in the shadows. Managers are extensively regulated, are subject to reporting requirements and do not engage in any significant sense in credit, liquidity or maturity transformation, so their activity is not ‘bank-like’. Credit hedge funds do not belong in the same category as banks, let alone ‘shadow banks’.”
The G20 mandated the Financial Stability Board (FSB) to develop recommendations to strengthen the oversight and regulation of the ‘shadow banking’ system in November 2010, but there has been considerable debate about what constitutes a ‘shadow bank’. Recent G20 language referred to 'money markets funds, securitization, securities lending and repo activities, and other shadow banking entities'.
Credit and credit-related hedge funds comprise up to one-third of the global hedge fund industry and use a very diverse range of investment strategies, ranging from fundamental credit analysis and arbitrage to the trading of complex derivatives.
*The Role of Credit Hedge Funds in the Financial System: Asset Managers, Not Shadow Banks
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For media enquiries, please contact Christen Thomson, AIMA’s Director of Communications. Tel: +44 (0)20 7822 8380; Email: firstname.lastname@example.org
As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 40 countries.
Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals and its excellent reputation with regulators worldwide.
AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. For further information, please visit AIMA’s website, www.aima.org.