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Alternative Market Briefing

Rand Corporation study finds hedge funds still have disruptive potential for US financial system

Friday, September 21, 2012

Beverly Chandler, Opalesque London: A new study published by The Rand Corporation entitled Hedge Funds and Systemic Risk, authored by Lloyd Dixon, Noreen Clancy and Krishna B. Kumar, finds that although hedge funds were not a leading cause of the recent financial crisis, they do have the potential to contribute to disruptions of the U.S. financial system going forward.

Dixon and his colleagues look back at recent hedge fund history to find context for their study. They refer to the collapse of Long-Term Capital Management (LTCM) in 1998 which raised awareness that hedge funds could be a source of risk to the entire financial system, plus the heavy investing by hedge funds in many of the financial instruments at the heart of the financial crisis of 2007–2008 and write: "It is appropriate to ask whether they contributed to the crisis."

This report explores the extent to which hedge funds create or contribute to systemic risk; the role hedge funds played in the financial crisis; the consequences of the 1998 failure of LTCM, and whether and how the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addresses the potential systemic risks posed by hedge funds.

Dixon and his team reflect that despite accounting for a growing proportion of financial market activity for some time, their structures as private investment pool......................

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