Study Warns FSOC of Big Risks in Asset Management Industry
At the request of the Financial Stability Oversight Council, the U.S. Department of Treasury’s Office of Financial Research issued a report raising significant risks in the asset management industry. The Report raises concerns about the significant concentration of assets in 10-20 firms and the lack of data and transparency into the industry. The Report highlights four significant risk: (i) manager incentives and competitive pressures leading to yield-chasing and herding behaviors especially into less liquid investments like funds-of-hedge-funds; (ii) redemption risk for pooled investment vehicles during times of financial stress; (iii) use of leverage in the form of derivatives; and (iv) larger firms having a ripple effect on the entire economy. The Report also discusses the ripple effect of these risks across the financial markets.
OUR TAKE: We have said it before: Regulators like to regulate. You didn’t really think that the FSOC would leave the asset management industry alone? Expect to hear more about “increasing transparency” especially into the largest asset management firms.