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[Washington, 30 de Reuters]- Investment company Arquegos Capital Management did not accept additional guarantees (additional guarantees) and was declared in default (default), causing a large loss for some of the major international banks. As a result, the move to review regulations to curb the rapid expansion of “shadow banking” such as hedge funds and family offices will intensify, and the risks facing the sector are likely to be clarified.
Hedge funds have been involved in the turmoil in the US Treasury market last year, the turmoil in the repo trading market in 2019, and the turmoil over gaming stocks in January this year, with non-bank supervision already being watched by Democrats and the Secretary of the Treasury. Janet Yellen, she was our top priority.
According to analysts, the loosely regulated non-bank sector has been hit by a stagnation at Arquegos, a family office of former hedge fund manager Bill Juan.
Arquegos did not invest in stocks managed through loans from financial institutions (leverage trading), causing losses of at least $ 6 billion to major banks that were lending money for such transactions, according to regulators. There are.
According to people familiar with the matter, Arquegos’ assets under management are around $ 10 billion, but the actual investment scale has expanded to around $ 50 billion due to leveraged transactions. However, since it manages Juan’s personal assets as a single family office serving only one family, it is not directly regulated.
The first Financial Stability Oversight Council (FSOC) under Biden’s administration will take place on the 31st, chaired by the Secretary of the Treasury, Janet Yellen. Analysts believe the meeting will discuss hedge fund activities and address the Arquegos issue.
The U.S. Securities and Exchange Commission (SEC), a member of the FSOC, is in discussions with brokers to understand the impact of the Arcegos issue on brokers and their clients, the scope of the problem, etc.
“With the forced pushback from Alkegos, Congress and federal regulators will continue to monitor the market game,” analysts at Raymond James said. Lawmakers said they would introduce new reforms and toughen disclosure rules for single family offices.
After the 2008 global financial crisis, Congress tightened banking rules, pushing risky activities into less regulated sectors called “shadow banks,” such as asset management and private funds.
In response to these movements, FSOC has begun to review the asset management industry. In 2016, he warned that if leveraged hedge funds were forced to sell, the stressed market could become unstable. The FSOC planned to monitor these risks and eliminate the data shortage, but the former Trump administration canceled the project.
Another regulatory “blind spot” is the family office. Single family offices are not required to register with the SEC. Therefore, unlike hedge funds, you do not need to disclose assets held, relationships with banks, or other operational information.
According to the FSOC annual report for 2020, assets under management of US hedge funds are estimated at $ 2.9 trillion, which is actually estimated at $ 6.3 trillion considering leveraged transactions, but office management relatives. There is no data on assets. shown.
Market players are surprised that Juan secretly borrowed so much money from financial institutions, but was barely monitored.
Dennis Kelleher, executive director of the Better Markets think tank, said in a note: “Arquegos had such an important position, what shares he owned, how he sold them, who owned them, etc. Neither was known in the market.” “This is because the shadow banking system is still opaque in a significant part and is much larger than in 2008,” he said.
According to market research firm Camden Wealth, as of 2019, family offices around the world had total assets under management of $ 5.9 trillion, a 38% increase over the past two years. Additionally, consulting firm EY recently estimated that the assets of single-family family offices around the world would exceed the sum of private equity (PE) and venture capital.
Family offices have become popular in the United States due to flexible regulation, and many have become family offices in the last decade, including well-known hedge funds.
Mr. Juan turned his hedge fund “Tiger Asia Management” into a single family office after being caught in 2012 for violating business regulations.
Keleher said the United States rules for the disclosure of family office and hedge fund information will be reviewed, and that the rules for managing broker and derivative risk that Juan used to leverage will also be subject to review. “Regulators under Biden’s administration must act swiftly and comprehensively to protect the financial system,” he said.
(Michelle Price reporter, Katanga Johnson reporter)
