Despite Recent Raids, Hedge Funds May Escape Fed Supervision

(December 20, 2010) – United States-based hedge funds, fearing the worst with a recent spate of federal raids, may be seeing some light at the end of the tunnel: a source close to the Federal Reserve is saying that these investment vehicles may escape direct supervision from the nation’s central bank.

The source – speaking to Thompson Reuters on the condition of anonymity – is quoted as asserting that the Fed does not believe any one hedge fund can topple the financial system, thus allowing them to be excluded from a list of systemically important financial institutions. This designation, currently under discussion by the Financial Stability Oversight Council (FSOC), makes certain firms subject to scrutiny from the Fed, but also gives them access to the central bank’s discount window.

According to Thompson Reuters’ source, hedge funds are likely to escape this designation. However, the source also added that information relating to investment positions at such funds could give the newly-created Council an inside look at relevant risks.

Although far from official, such statements by those close to the Federal Reserve – which holds much power on the 14-member FSOC – are sure to provide a bright spot for an industry under siege. Last month, three hedge funds were raided as part of a joint probe of the FBI, the Manhattan US Attorney's office, and the Securities and Exchange Commission.