GLOBAL - Regulators in Europe and US are likely to intervene in the "overheated" hedge fund market as a result of growing concerns about the huge flow of pension fund assets into hedge funds, according to a new study.
The study by Greenwich Associates found that the growing availability of cheap credit was making it easier for hedge funds to increase their leverage - almost one-third of hedge funds have increased their use of leverage over the past 12 months.
Greenwich consultant Peter D’Amario said: “None of these developments- - a flood of pension capital, increasing leverage, declining haircut requirements or easier credit — would, on its own, be a cause for immediate concern.
“In aggregate, however, these trends bear serious consideration on the part of hedge fund investors, not only as possible indicators of an ‘overheated’ market, but also as potential harbingers of intervention by regulators in the United States and Europe.”
Greenwich said that the biggest contributor to the current hedge fund boom is the widespread participation of pension funds, whose investments in the sector have raised serious concerns among regulators.
The study also found that a quarter of the 36 hedge funds participating in the study reported that their prime brokers are extending more credit now than they were six months ago, and 20% said that their prime brokers had decreased their haircut requirements during the same period.
“Without a doubt, the ability of hedge fund managers flush with capital — including pension capital — to shop from multiple prime brokers’ offerings is contributing to the overall growth of the hedge fund industry,” says Greenwich Associates consultant Tim Sangston.
“The question is whether the industry is growing too fast. Has it become too easy to set up a hedge fund? Has it become too easy to get capital? Has it become too easy to leverage?”
The Pensions and Lifetime Savings Association (PLSA) is in the process of convening an industry-wide group to take forward the work of the Institutional Disclosure Working Group (IDWG).
The Transfers and Re-registration Industry Group (TRIG) has given its support to an initiative which aims to complete occupational pension transfers within three weeks.
Scottish Widows has completed a bulk annuity deal for the Hitachi UK Limited Pension Scheme.