FSB flags hedge funds’ synthetic leverage as market instability risk

The Financial Stability Board (FSB) has expressed concerns about certain hedge funds using “very high levels of synthetic leverage.”  

The Financial Stability Board (FSB) has expressed concerns about certain hedge funds using “very high levels of synthetic leverage.” 

Synthetic leverage involves debt generated through complex financial instruments that often do not appear on balance sheets. While the FSB did not name specific hedge funds, it alluded to strategies related to recent market disruptions, such as the Archegos Capital Management default and turmoil in the US Treasuries market. Regulators find synthetic leverage harder to assess than traditional borrowing, making it challenging to measure institutions’ exposures.  

The FSB also highlighted concerns about “hidden leverage” as hedge funds typically borrow from multiple prime brokers to increase their bets, potentially amplifying shocks in the financial system. The FSB sees this as a key area of policy focus in 2024 and aims to address data gaps on non-bank financial institutions’ exposures while implementing measures to contain excessive leverage behavior.  

Read more: https://www.ft.com/content/3ac828d2-1cef-48ec-b3f3-07601aa226c3