Inside Money: Vanilla with a hint of GFC - why fund managers taste of risk to the IMF

A new IMF report says that fund managers, even the 'vanilla' vendors, could pose a risk to the global financial system. Photo / Thinkstock

Fund managers - even the 'vanilla' vendors - could pose a risk to the global financial system, according to a new International Monetary Fund (IMF) report.

'The asset management industry and financial stability' study, published last week, says the rising influence of global fund managers in world markets has introduced new, largely unexamined, systemic risks.

Post-GFC, hedge funds, high-speed traders and other exotically-flavoured investment concoctions have already been investigated by the global risk police but the new IMF report takes the worrying into the "plain-vanilla" world, where managers supposedly deal in simple securities (bonds, shares) in traditional styles.

"By now, the assets under management of top asset management companies (AMCs) are as large as those of the largest banks, and they show similar levels of concentration," the report says.

However, the IMF study says to date regulatory attention has been directed at creating better disclosure to end investors rather than considering the broader implications of a concentrated funds industry.

"Currently, the oversight of the industry focuses on investor protection and disclosure, and regulators conduct little monitoring in most countries," the report says. "Securities regulators should shift to a more hands-on supervisory approach with better data, risk indicators, and analysis, including stress testing, according to the IMF. Establishing global standards on how to monitor and supervise the industry is essential."

The study details a skewed relationship between funds and investors, where well-meaning incentives can actually speed the way to a market meltdown.

"A common (and imperfect) way of establishing incentives is to evaluate funds relative to their peers and relative to benchmarks," the report says. "This form of evaluation, in turn, can lead to a variety of trading dynamics with potentially systemic implications, such as herding or excessive risk taking."

The IMF proposed cure, however, might not sound that palatable to either investors or managers. For example, the IMF suggests funds - or at least those designated as global systemically important financial institutions (G-SIFIs) - could make it harder for investors to withdraw their money in a crisis.

While managers might like that one, they would probably object to the IMF suggestion that funds have prescriptive liquidity levels or a hard cap on leverage.

Despite the at times alarmist tone in the report, the IMF admits its fund manager worries are essentially thought experiments at the moment.

"This task is challenging given that the risks of concern have not yet or only partially materialised in advanced economies; inference, therefore, often has to be indirect," says the IMF, which can taste GFC in everything.