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Alternative Market Briefing

Paper examines ties between hedge funds and financial conglomerates

Friday, April 07, 2017

Bailey McCann, Opalesque New York:

A new paper from Francesco Franzoni, Professor of Finance at the Università della Svizzera Italiana (USI Lugano) and Mariassunta Giannetti, at the Stockholm School of Economics argues that recent regulation like the Volcker Rule aimed at cutting the ties between hedge funds and financial conglomerates in Europe and the US should be rethought. According to the authors, hedge funds that are sponsored by financial conglomerates often help to keep financial markets running smoothly and outlawing them entirely could have unforeseen costs.

The paper's authors argue that hedge funds backed by large financial conglomerates have historically provided liquidity to the market and corrected mispricing. The credibility that these funds enjoy by virtue of being associated with a large financial conglomerate also means that clients in those funds tend to redeem less often, making the fund more stable over the long-term. This idea builds on earlier research from Chen, Goldstein, and Jiang (2010), which argues that when a hedge fund has investors that are quick to redeem, that behavior is likely to send other investors - even happy ones - running for the exits.

Hedge funds affiliated with financial conglomerates also have a history of offering investors better terms like shorter lock-up periods, because the hedge fund has easier access to funding as part of a bigger platform. Data in the paper suggests that this combination of credibility and......................

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