The regulation of hedge funds under the prism of the financial crisis
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2008-20.
Length: 31 pages
Date of creation: 2008
Date of revision:
financial leverage; prime brokers; securitization; extreme risks; systemic risk; opacity; long run institutional investors; due diligence; monitoring; disclosure; market discipline; public regulator;
Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-FMK-2008-12-14 (Financial Markets)
- NEP-REG-2008-12-14 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Staff Reports, Federal Reserve Bank of New York 291, Federal Reserve Bank of New York.
- 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.
- Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene M., 2006. "Is There Hedge Fund Contagion?," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2006-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2006. "Is There Hedge Fund Contagion?," NBER Working Papers 12090, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valérie Mignon).
If references are entirely missing, you can add them using this form.