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Highwaymen or heroes: should hedge funds be regulated?

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  • Danielsson, Jon
  • Taylor, Ashley
  • Zigrand, Jean-Pierre

Abstract

The exponential growth of hedge funds, their role in financial crises in the 1990s, and examples of fraudulent behaviour have precipitated a heated debate over their regulatory status. The existing approaches of greater disclosure and activity restrictions appear too blunt to be effective and may stifle the benefits hedge funds can bring to the financial system. But, even the remote possibility of a systemic crisis weighs against no regulation. If reform is delayed until after a crisis it is likely to be politically influenced and sub-optimal. We argue that any reform should involve both the promotion of measures to reduce the likelihood of failure of a major hedge fund and crisis management procedures to address any fallout if this occurs.

Suggested Citation

  • Danielsson, Jon & Taylor, Ashley & Zigrand, Jean-Pierre, 2004. "Highwaymen or heroes: should hedge funds be regulated?," LSE Research Online Documents on Economics 24782, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24782
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    File URL: http://eprints.lse.ac.uk/24782/
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    References listed on IDEAS

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    1. Jean-Pierre Zigrand, 1999. "Arbitrage and Endogenous Market Integration," FMG Discussion Papers dp319, Financial Markets Group.
    2. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    3. van Wincoop, Eric, 1999. "How big are potential welfare gains from international risksharing?," Journal of International Economics, Elsevier, vol. 47(1), pages 109-135, February.
    4. L. Randall Wray & Stephanie Bell, 2004. "Introduction," Chapters,in: Credit and State Theories of Money, chapter 1 Edward Elgar Publishing.
    5. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
    6. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-748, September.
    7. Jean-Pierre Zigrand, 2001. "Rational Limits to Arbitrage," FMG Discussion Papers dp392, Financial Markets Group.
    8. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    9. Zigrand, Jean-Pierre, 2001. "Rational limits to arbitrage," LSE Research Online Documents on Economics 25068, London School of Economics and Political Science, LSE Library.
    10. Jean-Pierre Zigrand & Jon Danielsson, 2001. "What Happens When You Regulate Risk? Evidence from a Simple Equilibrium Model," FMG Discussion Papers dp393, Financial Markets Group.
    11. Zigrand, Jean-Pierre, 2004. "A general equilibrium analysis of strategic arbitrage," Journal of Mathematical Economics, Elsevier, vol. 40(8), pages 923-952, December.
    12. Connor, Gregory & Woo, Mason, 2004. "An Introduction to hedge funds," LSE Research Online Documents on Economics 24675, London School of Economics and Political Science, LSE Library.
    13. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 1999. "Optimal Risk Management Using Options," Journal of Finance, American Finance Association, vol. 54(1), pages 359-375, February.
    14. Philippe Robert-Demontrond & R. Ringoot, 2004. "Introduction," Post-Print halshs-00081823, HAL.
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    Cited by:

    1. Adams, Zeno & Füss, Roland & Gropp, Reint, 2014. "Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(03), pages 575-598, June.
    2. Photis Lysandrou, 2012. "Hedge funds," Chapters,in: Handbook of Critical Issues in Finance, chapter 21, pages i-ii Edward Elgar Publishing.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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