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The regulation of hedge funds under the prism of the financial crisis

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  • Michel Aglietta
  • Sandra Rigot
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    Abstract

    This paper deals with two issues. On the one hand, it shows that structural changes in financial markets and in the hedge funds industry make the “light-touch” arguments for regulating hedge funds no longer relevant. On the other hand, pleas for stronger regulation of hedge funds are getting more attention. In the first part of the paper the huge expansion of the industry is outlined and the state of current regulation is highlighted. In the second part an in-depth analysis of risks associated with hedge funds is carried out. It is shown that systemic risk can arise from leverage and from concentration of exposures amongst hedge funds. The part played by hedge funds in the spread of the crisis of structured credit is portrayed. In the third section, the recommendations of professional organisations, regulatory authorities and international institutions are summed up within the framework of risk mapping. This oversight shows the ways of reform: the need of direct regulation, the enhancement of indirect regulation and the overhaul of securitization. The prospective pattern of regulation encompasses macro and micro issues, and impinges upon factors of demand and supply. It emphasizes the enhanced role of public regulators and displays the conditions of an effective market discipline performed by long run institutional investors.

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    File URL: http://economix.fr/pdf/dt/2008/WP_EcoX_2008-20.pdf
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    Bibliographic Info

    Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2008-20.

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    Length: 31 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:drm:wpaper:2008-20

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    Related research

    Keywords: financial leverage; prime brokers; securitization; extreme risks; systemic risk; opacity; long run institutional investors; due diligence; monitoring; disclosure; market discipline; public regulator;

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    References

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    1. John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-18.
    2. Boyson, Nicole & Stahel, Christof & Stulz, Rene, 2008. "Is There Hedge Fund Contagion," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 08-2, University of Pennsylvania, Wharton School, Weiss Center.
    3. Buiter, Willem H, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6596, C.E.P.R. Discussion Papers.
    4. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc.
      • Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-338 National Bureau of Economic Research, Inc.
    5. Adrian Blundell-Wignall, 2007. "An Overview of Hedge Funds and Structured Products: Issues in Leverage and Risk," Financial Market Trends, OECD Publishing, OECD Publishing, vol. 2007(1), pages 37-57.
    6. Danielsson, Jon & Taylor, Ashley & Zigrand, Jean-Pierre, 2005. "Highwaymen or heroes: Should hedge funds be regulated?: A survey," Journal of Financial Stability, Elsevier, Elsevier, vol. 1(4), pages 522-543, October.
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