May 17, 2022

Hedge Funds Reject Central Banker Criticism on Volatility

Hedge funds are pushing back against the regulators who blame them for stoking extraordinary market volatility in March when the pandemic hit.

The Washington-based Managed Funds Association says its members lack the firepower to disrupt the $20 trillion U.S. Treasuries market, as executives at the Bank of England and Bank for International Settlements have said.

The lobby, whose members manage about $1.6 trillion of assets, funded research by Harvard Business School Professor Marco di Maggio that points the finger at foreign institutions as big sellers of Treasuries. And the part of the Treasury market that the funds tended to trade — the cheapest-to-deliver bonds — didn’t suffer the same upheaval, Di Maggio wrote.

“Aggregate Treasury positions held by hedge funds were far too small to be the main cause of the disruptions,” Di Maggio wrote.

Read more: Before Fed acted, leverage burned hedge funds in Treasury market

In contrast, the BOE’s executive director of markets said in June that the funds were “stress amplifiers” through forced selling to meet margin calls as they unwound an estimated $90 billion of the trades. The Basel-based BIS called them “a key driver” of the “startling” and “severe dislocation” in the market.

Di Maggio’s research feeds into the debate among academics and regulators over the market mayhem in March that led to Federal Reserve intervention. Economists at the Fed and U.S. Treasury’s Office of Financial Research published work in July that cast doubt on some of the BoE and BIS arguments.

The Financial Stability Board, a global panel of regulators set up after the 2008 financial meltdown, is now conducting another review of the period and is looking at players in both the banking and non-banking industries.

“Getting the diagnosis right is crucial,” Michael Pedroni, executive vice president at MFA, said in a statement. “We see no evidence that any hedge fund posed systemic risk.”

(Adds professor’s comment in fourth paragraph.)

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