Tags: Hedge | Funds | Skirt | Direct | Fed | Scrutiny

Source: Hedge Funds May Skirt Direct Fed Scrutiny

Monday, 20 Dec 2010 02:02 PM

The U.S. Federal Reserve does not believe any one hedge fund can topple the financial system and therefore the private pools of capital may escape direct supervision by the central bank, an industry source familiar with the Fed's position said.

The newly created Financial Stability Oversight Council, which includes the Treasury secretary and 14 U.S. supervisors, including the Fed, are in the early stages of determining which non-bank firms pose a threat to the financial system.

Firms labeled as "systemically important" will be subject to rigorous oversight by the Fed but will also have access to the central bank's emergency lending facilities.

The indication that hedge funds might escape this designation is sure to send a huge sigh of relief through the $1.7 trillion industry, which has long avoided the tighter controls imposed on mutual funds, for example.

In exchange for looser regulations, hedge fund firms promise to allow only wealthy and sophisticated investors like pension funds and endowments into their portfolios.

The Fed's view will carry considerable weight among the Financial Stability Oversight Council, which was created by the Dodd-Frank legislation to monitor risks to the financial system in the aftermath of the 2007-2009 credit crisis.

The source said the Fed does not think anyone hedge fund can be "systemically important" but believes that information about the funds' positions could give the council insight into potential risks. The source requested anonymity while discussing talks held with the Fed.

The Fed did not immediately return a call seeking comment.

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