The tie between hedge funds and financial stability: is the current financial crisis a call for regulation?(2009)
AbstractThe attitude of regulatory authorities towards hedge funds has been severely affected by the current international financial crisis. The international financial crisis, and the need to develop a brand new regulatory framework to address the current failures, urges a solution for the problem of what degree of regulation should be required for hedge funds. At the same time, the mistake of over-regulation, by using hedge funds as an easy scapegoat for a crisis caused by many different shortcomings and several regulatory loopholes, should be avoided. The examples of the U.S. and Singapore regulatory experience with hedge funds show that the introduction of a strict, direct regulation of hedge funds is not justified. Even self-regulation, that is undoubtedly beneficial for the regulatory system, cannot be considered an effective response to regulatory loopholes by itself. Regulations could probably be implemented more efficiently on the pension fund and commercial bank side, as opposed to a probably inefficient direct regulation of hedge funds themselves. In short, the recent proposals for a tight, direct regulation of hedge funds, arisen as a response to the international credit crunch, could represent a dangerous step on the path of over-regulation of a highly leveraged industry that provides liquidity and stability to the financial markets, and that needs flexibility to be able to survive. In order to properly address the problems arising from the steady growth of hedge funds, the public authorities should probably make reference to the positive trends experienced before the occurrence of the international credit crunch, which means: an acceptable balance between indirect regulation and self-regulation. Such a mixed regulatory system, if properly developed, could be able to address the above described shortcomings of the hedge fund industry, without impairing its beneficial effects for the economic system as a whole.
- hedge funds,
- financial crisis,
- financial institutions
Publication DateSpring May 29, 2009
Citation InformationDomenico Ferrari. "The tie between hedge funds and financial stability: is the current financial crisis a call for regulation?" (2009)
Available at: http://works.bepress.com/domenico_ferrari/2/