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Bank of England's Cunliffe fires warning shot at hedge funds

LONDON, Oct 15 (Reuters) - Hedge funds that rely wholly on borrowed money to fund market bets need closer scrutiny in case they pose a threat to financial stability, the Bank of England’s Deputy Governor Jon Cunliffe said on Thursday.

In the latest sign of how the central bank is casting its eye beyond its traditional banking turf, Cunliffe said that hedge funds taking even apparently safe bets on market moves wholly leveraged could be “explosive”.

“When things start to move against you in extreme events, the leverage really hits you and the margin call really hits you,” Cunliffe told an online event hosted by the Washington-based Peterson Institute for International Economics.

“Some of those hedge fund strategies I think need to be looked at to make sure that’s not the issue we are facing,” Cunliffe said.

“It’s great to have people who arbitrage between the cash market and the derivatives market in good times, but not if the cost of that is a really big vulnerability in stressed times.”

Markets suffered bouts of extreme volatility and a “dash for cash” in March when economies went into lockdown to fight the pandemic.

Funds were helped by huge liquidity injections from central banks into markets to stabilise the financial system.

Regulators across the world are looking what reforms are needed to make investment funds more resilient to shocks. (Reporting by Huw Jones)