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Hedge funds, financial intermediation, and systemic risk

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  • John Kambhu
  • Til Schuermann
  • Kevin J. Stiroh

Abstract

Hedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such as their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark against financial market disruptions with potential systemic consequences has been the set of counterparty credit risk management (CCRM) practices by the core of regulated institutions. The characteristics of hedge funds make CCRM more difficult as they exacerbate market failures linked to agency problems, externalities, and moral hazard. While various market failures may make CCRM imperfect, it remains the best line of defense against systemic risk.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 291.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:291

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Keywords: Hedge funds ; Financial markets ; Financial risk management ; Capital market;

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Cited by:
  1. Michel Aglietta & Sandra Rigot, 2008. "The regulation of hedge funds under the prism of the financial crisis," EconomiX Working Papers 2008-20, University of Paris West - Nanterre la Défense, EconomiX.
  2. Patrick M McGuire & Kostas Tsatsaronis, 2008. "Estimating hedge fund leverage," BIS Working Papers 260, Bank for International Settlements.
  3. Ang, Andrew & Gorovyy, Sergiy & van Inwegen, Gregory B., 2011. "Hedge fund leverage," Journal of Financial Economics, Elsevier, vol. 102(1), pages 102-126, October.

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