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The Regulation of Hedge Funds under the Prism of the Financial Crisis. Policy Implications

Author

Listed:
  • Michel Aglietta

    (Paris X EconomiX and Cepii)

  • Sandra Rigot

    (Paris X EconomiX)

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 hightlighted. In the second part an in-depth analysis of risks associated with hedge funds is carried out. It is shown that systemic risks 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 recommandations of professional organisations, regulatory authorities and international institutions are summed up within the framework of risk mapping. This oversight shows the way to reform: the need for direct regulation, the enhancement of indirect regulation and the overhaul of securitization. The prospective pattern of regulation encompasses macro- ans micro-issues, and impinges upon factors of demand and supply. It emphasizes the enhanced role of public regulators and displays the conditions for an effective market discipline performed by long run institutional investors.

Suggested Citation

  • Michel Aglietta & Sandra Rigot, 2009. "The Regulation of Hedge Funds under the Prism of the Financial Crisis. Policy Implications," Discussion Papers (REL - Recherches Economiques de Louvain) 2009011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvre:2009011
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    File URL: http://sites.uclouvain.be/econ/DP/REL/2009011.pdf
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    Citations

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    Cited by:

    1. Navin Beekarry, 2010. "Hedge Funds and Offshore Financial Centers: New Challenges for the Regulation of Systemic Risks," Chapters, in: Benton E. Gup (ed.), The Financial and Economic Crises, chapter 11, Edward Elgar Publishing.

    More about this item

    Keywords

    financial leverage; prime brokers; securitization; extreme risks; systemic risk; opacity; long run institutional investors; due diligence; monitoring; disclosure; market discipline; public regulator.;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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