Can Regulation Rescue Financial Markets from the Invasion of Hedge Funds?

Bahadir ildokuz


Following the crisis of Long Term Capital Management (LTCM), concerns about the hedge funds have increased tremendously. Since the LTCM crisis; hedge fund industry has grown impressively, attracted many investors due to the high rate of returns and has begun to act as financial market leaders which also in return increased the concerns. The problems that hedge funds are able to cause, were seen during this crisis and proved that the benefits of hedge funds can easily be reversed and cause a financial disaster. This ability of hedge funds took the attention of regulatory authorities. This paper discusses the costs and benefits of the hedge funds, shows how hard it can be to impose further regulations on the problematic areas and tries to come up with some possible solutions for these problems that threaten the systemic stability.  

Full Text:



Bank of England 2005. “The financial stability conjuncture and outlook,” Financial Stability

Review, Vol. 1, No. 4, October 2005.

BarclayHedge, Available at

Beales and Chung, J. 2006. “Banks Take to a Supporting Role as Hedge Funds Flourish,”

Financial Times, August 2006.

Bernanke, B. S., and M. Gertler. 1989. “Agency Costs, Net Worth, and Business

Fluctuations.” American Economic Review 79, no. 1 (March): 14-31.

Bernstein, P. J. 2002, “The Hedge Fund Mystique”, Journal of Accountancy, May, p. 55.

Bradbery, A. 2004, “U.K. Pension Managers Turn to Hedge Funds”, Wall Street Journal,

August 2004.

Caldwell, T. and T. Kirkpatrick 1995. A Primer on Hedge Funds, Lookover Mountain

Capital Inc.

Caldwell, T., 1995, Introduction: The model for superior performance, in: J. Lederman, R.A.

Klein (Eds.), Hedge Funds. Irwin Professional Publishing, New York, pp. 1–17.

Chan, N., M. Getmansky, S. M. Haas, and A. W. Lo. 2005. “Systemic Risk and Hedge

Funds.” MIT Sloan Research Papers, No. 4535, February 2005.

CSFB/Tremont Hedge Index, Available at

Danielsson, J., Taylor, A. and Zigrand, Jean-Pierre. 2005. “Highwaymen or Heroes, Should

Hedge Funds be Regulated?,” Journal of Financial Stability 1(4): 522-43.

Edwards, Franklin R., 2004: “The Regulation of Hedge Funds: Financial Stability and Investor

Protection”, in Theodor Baums & Andreas Cahn(eds.) Hedge Funds, Risks and

Regulation, De Gruyter Rechtswissenschaften Verlags-GmbH, 2004, pp. 30-55.

Eichengreen, B. 1999. “The Regulator's Dilemma: Hedge Funds in the International

Financial Architecture,” journal of International Finance, November 1999.

Ersel, H. 2002. “Kredi Piyasası, Düzenleyici Yetke ve İktisat Politikası,” İstanbul

İletişim Yayınları, December 2002.

European Central Bank. 2006. Financial Stability Review. June. Available at


Financial Services Authority. 2005a. Hedge funds: A discussion of risk and regulatory

engagement. Technical Report DP05/4.

Fung, W. and D.A. Hsieh 1999. “A primer on hedge funds,” Journal of Empirical Finance

, 309-331.

Fung, William K.H. and Hsieh, David A. (2006). “Hedge Funds: An Industry in Its

Adolescence,” Economic Review - Federal Reserve Bank of Atlanta, Fourth Quarter 2006.

Garbaravicius, T., and F. Dierick (2005). “Hedge Funds and Their Implications for Financial

Stability.” European Central Bank Occasional Papers, No. 34, August 2005.

Harmes, A. (1998). “The Trouble With Hedge Funds,” Guest Column, The Globe and Mail,

December, 1998.

Hennessee Group (2003). Comments of Hennessee Group LLC - for the U.S. Securities and

Exchange Commission Roundtable on hedge funds May 14- 15, 2003.

Hennessee Hedge Fund Index, Available at

Hildebrand, P. M. 2007. “Hedge Funds and Prime Broker-Dealers: Steps Towards a ‘Best

Practice Proposal.’” Banque de France Financial Stability Review 10, April: 73-83.

Hutson, E and Donabedian, M. (2003). “Hedge Funds: The Case For Disclosure Regulation,”

Irish Banking Review, May 2003.

Kahan, M. and Rock, E.B. (2006). “Hedge Funds in Corporate Governance and Corporate

Control,” ECGI - Law Working Paper, No. 76, 2006.

Kambhu, J. , Schuermann, T. and Kevin J. Stiroh (2007). “Hedge Funds, Financial

Intermediation, and Systemic Risk,” Economic Policy Review, Vol. 13, No. 3, December 2007.

Lowenstein, R. (2000). When Genius Failed: The Rise and Fall of Long-Term Capital

Management, (New York: Random House.)

Mercer Oliver Wyman. 2006. “New Study Reveals Strengthened Global Hedge Fund Industry

Risk Management Practices and Highlights Areas for Improvement.” Press release, June 20. Available at .

Naik, N.Y. and Tapley, M. (2007). “Demystifying Hedge Funds,” Business Strategy Review,

Vol. 18, No. 2, June 2007

Rajan, R. G. (2005). “The Greenspan Era: Lessons for the Future.” Remarks delivered at the

Symposium on Financial Markets, Financial Fragility, and Central Banking, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole and Wyoming, August 2005.

SEC (2003b). US Securities Exchange Commission staff report on the implications of the

growth of hedge funds. Technical report, Securities Exchange Commission

US President’s Working Group on Financial Markets (1999). “Hedge Funds, Leverage, and

the Lessons of Long-term Capital Management,” April 1999.

Van Wincoop, E. (1999). “How big are potential welfare gains from international

risksharing?” Journal of International Economics, 47:109–135.

Vaughan, D. A. (2003). “Selected Definitions of Hedge Fund,” comments for the US SEC

Roundtable on Hedge Funds, 14-15 May

Yago, G., Ramesh, L. and Hochman, N.E.. (1998). “Hedge Funds and Systemic Risk

Demystified,” Santa Monica, CA: Milken Institute.


  • There are currently no refbacks.

Copyright (c) 2017 Bahadir ildokuz

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.