The Regulator's Dilemma: Hedge Funds in the International Financial Architecture.

This paper considers the role of hedge funds in international financial markets, with a focus on market manipulation, the issue of concern to smaller countries, and systemic stability, the issue of concern to larger ones. To address market integrity, it recommends expanding the coverage of the US Large Trade and Position Reporting System and establishing analogous reporting mechanisms in other countries where they do not presently exist. To address systemic stability, it recommends tightening up supervision of hedge fund counterparties and strengthening market discipline. It concludes that emerging markets at risk from hedge fund operations have no choice but to protect themselves. Self-protection in this context means adopting more flexible exchange rates as a way of removing the one-way bets that hedge fund managers find irresistible and placing holding period taxes on portfolio investments to discourage the round-tripping they find so attractive. Copyright 1999 by Blackwell Publishers Ltd.