Big asset managers could pose risk to market, US Treasury says
Report cites herd behaviour as firms pile in and out of investments, could herald tighter regulatory scrutiny
Some activities of asset managers could pose risks to the broader marketplace, according to a study released by the US Treasury Department on Monday that boosted the likelihood the largest such firms would face tougher federal scrutiny.
The report lays out potential factors that could be used to determine if an asset manager is risky. These include the use of leverage aimed at boosting returns, such as through the use of derivatives, or a reliance on borrowing.
The study also discusses how “herding" – the tendency of managers to crowd into similar or the same assets at the same time – can pose risks if the investments are illiquid.
“A certain combination of fund and firm-level activities within a large, complex firm or engagement by a significant number of asset managers in riskier activities could pose, amplify or transmit a threat to the financial system,” according to the report by the Office of Financial Research, a Treasury arm.
“These threats may be particularly acute when a small number of firms dominate a particular activity or fund offering.”
The report does not draw any conclusions about particular asset managers or whether any firms should be designated as potentially risky to the broader market.
However, the findings make it appear more likely that tougher scrutiny is on the horizon for large firms such as BlackRock, Vanguard and Fidelity Investments.