hedge strongfundsstrong and systemic risk - banque de france.pdfVIP

Hedge funds and systemic risk ROGER FERGUSON DAVID LASTER Head of Financial Services Senior Economist and member of the Executive Committee Economic Research Consulting Swiss Re Swiss Re A hedge fund is a privately offered investment vehicle that pools the contributions of investors in order to invest in a variety of assets, such as securities, futures, options, bonds and currencies. Hedge funds have attracted growing attention from policy makers, fi nancial market participants and the general public due to their rapid growth and substantial scale, their importance to banks as clients and the impact of their trading activity on global capital markets. Because of their rapid growth and the market disruptions caused by Long-Term Capital Management (LTCM) in 1998, some analysts believe that hedge funds pose systemic risks. However, this is unlikely. A thorough review of the avenues through which hedge funds could cause systemic problems indicates that, although a major disruption emanating from the hedge fund sector is possible, it would be diffi cult for the sector to be highly disruptive to fi nancial markets. Post-LTCM, regulatory authorities have encouraged banks to monitor their hedge fund clients through constraints on their leverage. This has thus far proven effective, as the recent failure of Amaranth demonstrates. That failure, the largest yet, caused hardly a ripple in the wider fi nancial markets. Hedge funds support the robustness of markets in many ways. They provide attractive investment alternatives and improv