Hedge Funds and Systemic Risk

The public media and politicians regularly debate the potential for hedge funds to contribute to systemic risk in financial markets. Because the hedge fund industry experienced substantial growth over the past two decades, concerns about hedge funds' systemic risk have increased and regulators have taken measures to mitigate possible risks associated with these funds. The chapter summarizes the pre- and post-crisis debate and highlights the post-crisis evidence regarding hedge funds' alleged systemic risk. In particular, the authors examine evidence regarding specific factors surrounding hedge funds' possible contributions to systemic risk, including risk management incentives, leverage, liquidity characteristics, regulation, financial stability, transparency, and their potential to induce and perpetuate market contagion