OFR_2016_Financial-Stability-Report

Report that insured banks must file. State authorities collect little data on
funds run by state-chartered banks. Regulators need to continue working
with each other and to collaborate with the industry on reporting standards.
Hedge Funds and Private Funds
The SEC’s Form PF collects unprecedentedly detailed data from private
fund advisers, including hedge funds. Public access to granular Form PF
data is limited due to confidentiality concerns.
Hedge funds report detailed information on asset class exposures, portfolio
and funding liquidity, counterparty exposures, collateral posted from
and to the fund, sources of borrowing, and investor composition. These data
begin to address a key data gap for risk analysis.
However, an OFR analysis found the information is still not sufficient
to fully assess the economic exposure of funds and the risks they face from
some investments. For economic exposures, OFR researchers found that
simulated hedge fund portfolios that invested in equities and equity options
and which appear identical based on Form PF could carry different levels of
market risk. That range was particularly wide for funds that used options,
a staple of many hedge funds (see Flood and Monin, 2016). The variation
narrowed significantly if funds reported using a risk gauge called Value-at-
Risk (VaR) (see Figure 70). Form PF gives advisers leeway in the measures
they report, and funds are not required to use VaR to
measure portfolio risk.
Form PF provides new information about funds’
credit exposures to counterparties. But the data are
not sufficient to fully assess counterparty exposures.
To understand collateral agreements, regulators may
need additional data on mark-to-market exposures,
including the amount of posted margin and contract
terms. The form also asks for detailed data about hedge
funds’ repo transactions, but not on securities lending.
Some data in Form PF are difficult to compare.
For example, portfolio, financing, and investor
liquidity are all measured using different bases. This difference
makes them difficult to evaluate in combination.
In addition, portfolio liquidity and stress testing
reporting fields require funds to make assumptions
about asset liquidity that may not be consistent.
The FSOC in 2016 created an interagency working
group to share and analyze regulatory information on
hedge fund activities. The working group will assess
the sufficiency and accuracy of Form PF and other
existing data for evaluating risks to financial stability.
Figure 70. Differences in Portfolio Risks (percent)
In simulations of fund portfolios with identical Form PF
data, market risk varied significantly, especially among
funds that used options and were not constrained by
Value-at-Risk (VaR)
700
600
500
400
300
200
100
0
Without options
With options
51% 68%
VaR-constrained
174%
579%
VaR-unconstrained
Note: Figure depicts the average normalized range in risk for
simulated equity market-neutral hedge fund portfolios with
identical Form PF filings.
Source: Flood and Monin (2016)
Key Threats to Financial Stability 85