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Would Hedge Fund Regulation Mitigate Systemic Risk? Direct vs. Indirect Regulation Approach

Author

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  • Mehnaz Roushan Laura
  • Nafiz Ul Fahad

Abstract

This paper presents the direct vs. indirect debate of hedge fund regulation and attempts to find which approach is better able to mitigate systemic risk that the industry poses to the economy. The waves of regulatory reforms and enhanced concern regarding investors protection have recently brought attention of the regulators to hedge fund regulation issue. But, many academics fear that direct intervention may limit industry growth and benefit. Addressing these concerns, this paper observes the systemic importance of hedge fund industry based on four criteria’s [size, leverage, interconnectedness to large complex financial institutions (LCFIs) and herding] and concludes that although this industry is still small in terms of size and leverage, their interconnectivity with LCFIs and potential herding make them systemically significant. Hence, regulation of hedge fund is necessary to restrict the transmission of systemic events. Analysing direct and indirect approaches, this paper suggests that the counterparties are best positioned to implement this regulatory change.

Suggested Citation

  • Mehnaz Roushan Laura & Nafiz Ul Fahad, 2017. "Would Hedge Fund Regulation Mitigate Systemic Risk? Direct vs. Indirect Regulation Approach," International Business Research, Canadian Center of Science and Education, vol. 10(8), pages 31-43, August.
    • Handle: RePEc:ibn:ibrjnl:v:10:y:2017:i:8:p:31-43
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    References listed on IDEAS

    as
    1. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
    2. Ang, Andrew & Gorovyy, Sergiy & van Inwegen, Gregory B., 2011. "Hedge fund leverage," Journal of Financial Economics, Elsevier, vol. 102(1), pages 102-126, October.
    3. Boyson, Nicole M., 2010. "Implicit incentives and reputational herding by hedge fund managers," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 283-299, June.
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    More about this item

    Keywords

    hedge fund; regulation; systemic risk;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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