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The Regulation of Hedge Funds under the Prism of the Financial Crisis. Policy Implications

Published online by Cambridge University Press:  17 August 2016

Michel Aglietta  and
Sandra Rigot
Michel Aglietta
Affiliation:
Paris X EconomiX and Cepii
Sandra Rigot
Affiliation:
Paris X EconomiX
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Summary

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 to reform: the need for 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 for an effective market discipline performed by long run institutional investors.

Résumé

Résumé

L'objet de cet article est double : d'une part montrer que les arguments qui justifiaient une régulation allégée des hedge funds ne sont désormais plus valables étant donné le changement structurel des marchés financiers et l'évolution récente de l'industrie des hedge funds qui en font des acteurs à enjeux systémiques et d'autre part apporter un nouvel éclairage sur la forme que doit revêtir la réglementation des hedge funds. Pour cela, nous procédons dans la première section à une clarification de la logique des arguments en faveur de la discipline de marché et de la régulation indirecte qui constituent l'approche réglementaire des hedge funds. Dans la seconde section, nous faisons une analyse théorique et empirique des risques associés aux stratégies des hedge funds. Nous montrons en quoi ils sont générateurs de risque systémique et en quoi ils sont des propagateurs de la crise du crédit structuré de l'été 2007. Dans la troisième section, nous faisons la synthèse des recommandations à la fois des organisations professionnelles, des autorités de régulation et des institutions internationales au regard de la cartographie des risques des hedge funds. Cette mise en perspective permet de distinguer quels sont les besoins de régulation directe des hedge funds et quelles sont les améliorations qui résulteraient indirectement d'une réforme de la régulation des autres acteurs qui interviennent dans la titrisation du crédit. Elle devrait se situer à la fois aux niveaux microéconomique et macroéconomique, concerner les facteurs de demande et d'offre, renforcer les prérogatives du régulateur public et enfin définir précisément les conditions d'une discipline de marché efficace dont les acteurs seraient les investisseurs institutionnels de long terme.

Keywords

levier financierprime brokerstitrisationrisque extrêmesrisque systémiqueopacitéinvestisseurs institutionnels de long termedue diligencemonitoringdivulgation d'informationdiscipline de marchérégulateur publicfinancial leverageprime brokerssecuritizationextreme riskssystemic riskopacitylong run institutional investorsdue diligencemonitoringdisclosuremarket disciplinepublic regulator

JEL classification

G23: Non-bank Financial Institutions • Financial Instruments • Institutional Investors
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 75 , Issue 1 , March 2009 , pp. 5 - 34
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2009 

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