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Hedge funds, financial intermediation, and systemic risk

John Kambhu, Til Schuermann and Kevin Stiroh ()

No 291, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: Hedge funds; Financial markets; Financial risk management; Capital market (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-rmg
Date: 2007
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