Newsletter March 2012:‘Credit hedge funds are not shadow banks,’ says paper

LONDON – As the regulation of shadow banking moves closer, financial firms outside the traditional banking sector are increasingly concerned to demonstrate that they should not be seen as part of the still-ill-defined group bearing the “shadow bank” label. In early March, the London-based Alternative Investment Management Association (AIMA), which represents many of the world’s hedge funds, produced a paper* arguing that credit hedge funds should definitely not be considered part of the shadow banking sector. The paper highlights crucial differences between the key functions of a traditional bank and those of credit hedge funds. Credit hedge funds, it says, do not take deposits, do not offer daily liquidity nor otherwise hold themselves out as guaranteeing the return of the invested principal. They manage their liquidity profiles by agreeing investor redemption terms which correspond to the liquidity profile of the underlying investments. They therefore do not engage in significant maturity transformation.