I commend the work and transparency of the FSOC Hedge Fund Working Group on its review and evaluation of leverage in the hedge fund industry.  I look forward to its continued analysis of these important issues.

To the substance of what the working group is analyzing:

Leverage can be a useful component of an investment strategy and may imply different levels of risk taking by a fund, as FSOC recognized in its April update on its review of asset management products and activities.[1]  But leverage is only one of many factors used to measure a fund’s risk.  The relationship between a fund’s use of leverage and risk, and whether that risk may have financial stability implications, is highly complex and multi-factored.  As the Working Group’s analysis shows the relationship between leverage and risk cannot be simplified to a single metric or data point.

The Working Group therefore has importantly identified other possible areas for further analysis that involves a review of a more comprehensive set of risk metrics related to the use of leverage by private funds.  That is the right approach.  The Working Group has also provided good input on how we could improve data collected from private fund advisers to make it more useful for the assessment of systemic risk.  I support this continued work to further develop the analysis and better assess the impact of private fund activities involving leverage.

As an aside, I also commend the Working Group for using the many analytical tools at its disposal, including various data sources and the expertise of the different members of FSOC.  That is the core strength of FSOC – truly tackling systemic risk requires a broader program than any one agency has or can execute.[2]  Indeed, hedge funds often interact with many different market participants, each potentially functioning under a different regulatory regime or regulator.  FSOC is an important forum – here and in other areas – for studying and identifying systemic risk across diverse and complex markets and different kinds of market participants.

So, I commend the Working Group for its report and look forward to its continued analysis of the hedge fund industry and its use of leverage.