Hedge Funds, Financial Intermediation, and Systemic Risk

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractHedge 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.

Fund Management and Systemic Risk – Lessons from the Global Financial Crisis

“…The reason is that it makes tracking of true credit and counterparty risk more challenging (Andersen, ; IMF, ; CGFS, ). This problem is arguably particularly severe in the case of CRT to HFs, since they are less transparent and more complex than most other financial firms (Lescreawaet, ; Kambhu et al., ) and have overtaken insurance companies as the dominant credit protection sellers (Vause, ). This, in turn, also makes the distribution of risk in the financial sector as a whole harder to observe from a macro‐prudential perspective.…”

Fund Management and Systemic Risk - Lessons from the Global Financial Crisis

“…The reason is that it makes tracking of true credit and counterparty risk more challenging (Andersen 2002;IMF 2002;CGFS 2003). This problem is arguably particularly severe in the case of CRT to HFs, since they are less transparent and more complex than most other financial firms (Lescreawaet 2006;Kambhu et al 2007) and have overtaken insurance companies as the dominant credit protection 6 Distributing risk among a wider range of financial actors, particularly outside the banking system, may reduce systemic risk in various ways (cf. Duffie 2007;Wagner 2006;Kiff et al 2003).…”

“…Kambhu et al 2007). LTCM and Amaranth Advisors are two examples of funding illiquidity through a run on funds' repo and other types of short term financing.…”

Risk and beta anatomy in the hedge fund industry

“…Notes 1. As discussed by Kambhu, Schuermann, and Stiroh (2007), when there are no tensions on market liquidity, traders are able to finance positions, trade in higher volume and smooth price shocks, making the markets more liquid. However, in market liquidity turmoil, the market volatility tends to increase, which in turn reflects on the variation margin and collateral calls that reduce market liquidity.…”