No hedge fund firm today should be designated a “systemically important financial institution” by regulatory authorities, according to the Alternative Investment Management Association (AIMA), the global hedge fund association.

In a statement today, the AIMA said that the Financial Stability Oversight Council is considering the criteria by which it will determine which non-bank financial companies may be deemed systemically important, and thus subject to increased regulatory scrutiny. The criteria is expected to be clarified soon.

The association said that no hedge fund manager based or operating in the US or elsewhere currently poses a risk to financial stability.

AIMA chair Todd Groome said no single hedge fund firm is sufficiently large, leveraged, complex, or interconnected that its failure or financial stress would cause a market disruption of the size necessary to destabilise the financial system.

“We note that the UK’s Financial Services Authority have stated that, based on their risk reporting framework, none of the large hedge funds they have examined currently poses ‘a significant systemic risk to the financial system’. We also note that the FSA’s hedge fund survey has found that major hedge funds ‘did not pose a potentially destabilising credit counterparty risk’, and that the levels of leverage employed were ‘relatively low’, which ‘suggests a contained level of risk’,” Groome said.

AIMA also cited the fact that during 2008 more than 1,400 individual hedge funds closed or were liquidated in an orderly manner. Groome said that it has been acknowledged by many regulators and policymakers that those closures had virtually no impact on hedge fund firms’ counterparties or the stability of the financial system at large.

“This difficult period provided a very up-to-date and significant stress test concerning hedge fund risk to markets.

“The 2008 experience shows that hedge funds are ‘safe to fail’, even if they are not fail-safe. Moreover, hedge fund activities do not typically contribute to procyclical market dynamics; they tend to be contrarian or to look for market inefficiencies and, through their investment activities tend to make markets more efficient. As such, hedge funds enhance diversity of market behaviour, and thus contribute positively to financial stability.”

However, the association reiterated its “strong support” for the registration of hedge fund managers, which it said would make more data available to allow better monitoring and assessment of markets.

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