The Opaque and Under-Regulated Hedge Fund Industry : Victim or Culprit in the Subprime Mortgage Crisis?

It has been argued that hedge funds were among the contributors to the fiscal crisis that arose from the securitization of subprime loans. The hedge fund industry, however, did not play a direct precipitating role in the events leading to the financial meltdown. Indeed, there is no one identifiable primary culprit because the crisis arose from a series of inter-related factors fueled, in part, by the deregulated environment in which financial institutions were operating. However, it is certainly a subject of great debate whether the structure and financial strength of the huge hedge fund industry, with approximately 10,000 funds and $2 trillion in assets in 2007, exacerbated the intensity of the meltdown 1) by being ready, willing, and able buyers for the collateralized debt obligations (CDOs) arising out of the mortgage-backed securities, 2) by contributing to the volatility of the market with stock sales to provide the massive amounts of cash required for investor redemptions and to meet margin calls, and 3) by investing in the toxic credit default swaps (CDSs) market