The regulation of hedge funds under the prism of the financial crisis

Michel Aglietta () and Sandra Rigot ()
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Michel Aglietta: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Sandra Rigot: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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

Keywords: financial leverage; prime brokers; securitization; extreme risks; systemic risk; opacity; long run institutional investors; due diligence; monitoring; disclosure; market discipline; public regulator (search for similar items in EconPapers)
Date: 2008
Note: View the original document on HAL open archive server: https://hal.science/hal-04140739
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