In a recent speech, Bank of England (BoE) Governor Andrew Bailey outlined four key concerns about hedge funds, particularly around multi-manage strategies, suggesting they:
- Contribute to systemic illiquidity through deleveraging
- Increase concentration and interconnectedness risks
- Exhibit herd behavior
- Operate with opacity
The Alternative Investment Management Association (AIMA) said in emailed commentary that the evidence does not support these claims. A closer look at the data tells a different story:
- The BoE’s stress tests show hedge funds react diversely to shocks, not as a herd
- Prime brokers already provide central banks with detailed portfolio data. Better regulatory data-sharing, not more regulation, is needed
- Leading multi-strategy funds have shown resilience in crises, including in 2008 and 2022
- Compared to central banks, mutual funds, and pension funds, hedge funds only played a minor role in the March 2020 US Treasury sell-off.
“Instead of focusing on hedge funds, we should consider ways to enhance market liquidity capacity during stress periods,” AIMA wrote.