Hedge Funds Not ‘Shadow’ Bankers


    Credit hedge funds should not be considered part of the ‘shadow banking’ sector, says a paper by the Alternative Investment Management Association (AIMA). Its 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. For example, credit hedge funds do not take deposits and do not offer daily liquidity or otherwise hold themselves out as guaranteeing the return of the invested principal. They manage their liquidity profiles by agreeing to 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. 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.’