PE Funds Have Much Less Systemic Risk Than Hedge Funds—SEC Report

Deborah L. Cohen | January 21st, 2016 | MMG

A new report from the Securities and Exchange Commission confirms the comparatively low level of systemic risk to the U.S. financial system posed by private equity funds.

The use of derivatives by private equity funds is dramatically less than hedge funds, according to the SEC, which released its first “Private Funds Statistics” report in October of last year. In the fourth quarter of 2014, PE funds reporting data to the SEC held, in aggregate, $66 billion in derivatives, just a fraction of the $14.59 trillion held by hedge funds.

Similarly, the average derivative holdings of private equity firms made up merely 3.8 percent of their aggregate net asset value, compared with a whopping 429.3 percent for hedge funds. More importantly, a significant portion of the derivatives used by private equity firms are designed to hedge risk rather than for speculative purposes. Hedge funds, on the other hand, frequently use derivatives such as swaps, futures and related instruments for speculative purposes.

In addition, private equity funds were significantly less leveraged than hedge funds, employing leverage of just 4 percent of their gross asset values. Hedge funds reported leverage of nearly 36 percent in the fourth quarter of 2014, the most recent period for which data was available.

“The SEC data confirm what ACG members have known all along. Private equity funds do not use derivatives in any significant way,” said ACG Global President and CEO Gary LaBranche, FASAE, CAE. “There is no systemic risk associated with private equity investment.”

The publication of the data, which were compiled by the SEC Division of Investment Management’s Risk and Examinations Office, marks the first time the agency has released comprehensive information on private investment funds. The SEC collected the data through Form PF and Form ADV filings and covered a two-year period beginning in the first quarter of 2013.

In the fourth quarter of 2014, 8,407 private equity funds were represented in the SEC data, compared with 8,635 hedge funds. Also providing data were other private funds, real estate funds and venture capital funds, among others.

The SEC cautioned that use of Form PF is still “a relatively new reporting requirement for advisers to private funds,” and as such, the agency “staff continues to work with the data and filers to identify and correct filing errors.”

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