Hedge Fund Regulation and Systemic Risk

Abstract

The global financial crisis (GFC) caused catastrophic losses in the highly regulated banking sector. In contrast, the largely unregulated global hedge fund industry navigated through the crisis relatively unscathed. As a consequence of the GFC, there is a tidal wave of opinion calling for reform of the global financial architecture, with a specific emphasis on tightened oversight of hedge funds. In this article, we consider the debate regarding the future of hedge fund regulation, building the case that regulatory reform to constrain excessive leverage must be applied in equal measure to all financial market participants, not just hedge funds. The challenge for regulators is to carefully craft a regime of transparency and disclosure that minimises the potential for systemic risk without jeopardising the financial innovation and entrepreneurship that are emblematic of the hedge fund sector.