MJP –
The most recent data shows that hedge funds’ exposures have increased to about $28 trillion, putting banks in a very precarious position.
The Office of Financial Research (OFR) of the United States Treasury said that, throughout the last year, hedge funds’ Gross Notional Exposure increased significantly.
From $22.946 trillion on March 31, 2023, to $28.579 trillion on March 31, 2024, this statistic has increased by 24.5%, according to the data.
Despite the banking crisis that hit in the spring of 2023, hedge fund exposures grew dramatically.
At that period, many significant financial institutions, including the second, third, and fourth biggest, went bankrupt or were in a very precarious financial position.
Users may easily see this tremendous rise in hedge fund exposures on the report’s graphic chart by dragging their pointer along the top green line.
This picture aids in demonstrating the magnitude and speed with which these risk exposures have grown, even throughout the wider banking sector upheaval.
To avert a repeat of the financial crisis that hit the United States between 2007 and 2010, the Dodd-Frank Act of 2010 established the OFR to monitor developing risks and report them to market and bank authorities.
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According to Wall Street on Parade, the influence of the OFR has been greatly diminished due to the increased lobbying, bullying, and regulatory capture by Wall Street.
“Therefore, the public is left to ponder the timing of the next blowup and Fed bailout while perusing the OFR’s website regarding the potentially disastrous risks associated with Wall Street today.”
A study from the Bank for International Settlements (BIS) was published on March 4th. It stated that as of 2022, the Prime Broker operations of three big U.S. banks—Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM)—served over 1,000 hedge funds apiece. A chart containing this data is included in the BIS report.
The fact that all three of these megabanks have a proven history of mismanaging risks in their interactions and dealings with hedge funds is what makes this situation particularly concerning.
Put another way, despite their history of bad risk management, the banks that operate deposit-taking institutions that are guaranteed by the federal government are also heavily involved in providing prime brokerage services to many hedge funds.
There are serious concerns regarding the possible vulnerabilities and risks to the financial system caused by these systemically important banks’ extensive prime brokerage exposure to more than 1,000 hedge funds each and their infamous track records of improperly managing these kinds of relationships.
This information from the BIS research shows that the biggest banks in the US have a lot of ties to the hedge fund business, which might make shocks and instability spread more widely in the financial system if not managed.
