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The Morning Brief: Fitch Warns Hedge Funds Pose Systemic Risk

Fitch Ratings warns in a new report that private funds such as hedge funds could pose “the greatest systemic risk” for the investment management industry. The firm is sounding this alarm based on key risk indicators identified by a paper published by the Financial Stability Board earlier this month. Potential drivers of systemic risk include size, substitutability, interconnectedness, complexity and cross-jurisdictional activities, according to Fitch.

“In our view, the two key drivers of systemic risk are the use of excessive leverage and ‘substitutability,’ or a fund’s gross (leveraged) size relative to its investment sector,” Fitch states in its report. “If one or more large, heavily leveraged funds come to represent ‘the market,’ this could introduce illiquidity in times of stress. We believe the combination of these two factors, excessive leverage and a large market footprint, are most likely to create systemic risk in times of stress.”

Fitch warns that larger, leveraged private funds pose the most systemic risk in the investment management industry since private funds are “lightly regulated” and their leverage constraints “are far looser, reflecting counterparty risk limits rather than regulatory limits.” On the other hand, regulated investment funds are less able to take on excessive leverage, it adds.

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BlueMountain Capital Management has tapped former Federal Reserve governor Jeremy Stein to be a paid consultant, according to a Wall Street Journal report. Stein will advise the New York hedge fund firm on issues including macro policies, financial regulation and risk management, according to the report, which points out that Stein is noted for sounding loud warnings that the Fed’s multi-year quantitative easing policies may be creating asset bubbles. He also recently expressed confidence in the U.S. economy.

This is not the first time Blue Mountain has signed on a high profile individual from the banking industry. The firm — founded in 2003 by Andrew Feldstein, who previously worked at J.P. Morgan as head of structured credit, high yield sales, trading and research and head of global credit, and Stephen Siderow, a one-time consultant at consulting giant McKinsey & Co. — in 2013 named Jes Staley as a managing partner. Staley spent more than 30 years at J.P. Morgan, serving as CEO of J.P. Morgan’s Investment Bank and CEO of J.P. Morgan Asset Management.

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French media giant Vivendi is apparently digging in for a long fight with P. Schoenfeld Asset Management, the New York-based activist hedge fund firm that owns slightly less than 1 percent of Vivendi’s shares. The firm, headed by Peter Schoenfeld, earlier this week called on Vivendi to boost its dividend. In a press release, Vivendi says this was not its first encounter with Schoenfeld. Its board received a letter from PSAM on December 22 calling on the company to sell Universal Music Group. However, Vivendi says it “made it clear” that UMG is not for sale and that UMG and Vivendi’s Canal+ Group “constitute the strategic pillars” in the building of a major industrial media and content group.

“The management board opposes the dismantling of Vivendi and reaffirms its desire to build a Paris-based, global industrial content and media group,” it adds in a press release. In a separate press release Vivendi says it received three requests from shareholders to include resolutions to be voted on at its April 17 annual meeting. However, it recommends that shareholders oppose all of them, including one proposal seeking to boost the dividend and another calling on the company to pay “an exceptional dividend.”

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So much for Herbalife’s March rally. Shares of the multi-level marketer of nutrition products plunged more than 8 percent on Tuesday to close at $41.25. Since March 2, the stock had quietly surged by nearly 50 percent. The stock is still up 19 percent in the calendar year, a blow for William Ackman’s Pershing Square Capital Management, which is famously betting against the stock.

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