Do Hedge Funds Pose any Risks for the Global Financial Markets?

The global hedge fund industry has continued to grow during the past decades, and as their influence increases so also are the concerns of some market analysts who believe that Hedge Funds pose dangers to the global financial markets. These fears are always exacerbated particularly during high market volatility. But there remain no scientific studies, which demonstrate empirically that hedge funds are dangers to the financial markets.

At the turn of the century, hedge funds globally managed assets in the range of $500 billion. In 2006, the exponential growth in global assets managed by hedge funds has pushed the level of assets under management to the range of $1.4 trillion.  But concerns about the dangers of Hedge Funds to the global financial markets may be exaggerated. In the past hedge funds utilized high leverage in trading, which may have been a factor in the enormous losses encountered by the Long Term Capital Management when the fund collapsed in 1998. Today contemporary hedge fund managers have lowered the levels of leverage employed in trading.

During the Asian financial crisis, many including some Asian Tiger governments charged that hedge funds were responsible for the crisis of Asian currencies, but a study by the International Monetary Fund concluded that hedge funds were not responsible for the Asian financial crisis. But while no evidence have been shown to support the claim that hedge funds pose dangers to the financial markets, hedge funds are generally blamed any time something goes wrong in the markets.

Few years ago, the U.S. Securities and Exchange Commission introduced its Hedge Fund Regulatory initiatives aimed to increase scrutiny of Hedge Funds. The SEC scrutiny may also help to increase transparency of hedge Funds, to the level not seen in the past. . In February 2007, a study group led by Henry Paulsen, the U.S. Secretary of the Treasury, recommended new proposals. The group recommended that the minimum net worth required for individual Hedge Fund investors be increased from $1 million to $2.5 million, but the hedge fund industry was left without any further regulatory proposals, indicating that no major hedge fund regulatory issues are pending, even after the study took an evaluative examination of the economic risks of hedge funds.

But critics of hedge funds have always ignored the potential benefits of hedge funds through the liquidity it affords to the markets. Hedge funds would always have a place in investment portfolios; for one thing their role for portfolio diversification would always be in demand. Today hedge fund investment strategies have increasingly been adopted by many conservative investment funds such as Pension funds, such shift illustrates that hedge funds have now become part of the mainstream investment asset allocation process.

Paul Oranika
Editor-in-Chief
Hedgefundexchange.net
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