Would Hedge Fund Regulation Mitigate Systemic Risk? Direct vs. Indirect Regulation Approach

International Business Research, 10(8), pp. 31-43, 2017

13 Pages Posted: 15 Jul 2017

See all articles by Mehnaz Laura

Mehnaz Laura

Jahangirnagar University - Department of Accounting and Information Systems

Nafiz Fahad

Auckland University of Technology (AUT); Independent University, Bangladesh (IUB) - School of Business

Date Written: May 13, 2017

Abstract

This paper presents the direct vs. indirect debate of hedge fund regulation and attempts to find which approach is better able to mitigate systemic risk that the industry poses to the economy. The waves of regulatory reforms and enhanced concern regarding investors protection have recently brought the attention of the regulators to hedge fund regulation issue. But, many academics fear that direct intervention may limit industry growth and benefit. Addressing these concerns, this paper observes the systemic importance of hedge fund industry based on four criteria’s [size, leverage, interconnectedness to large complex financial institutions (LCFIs) and herding] and concludes that although this industry is still small in terms of size and leverage, their interconnectivity with LCFIs and potential herding make them systemically significant. Hence, regulation of hedge fund is necessary to restrict the transmission of systemic events. Analysing direct and indirect approaches, this paper suggests that the counterparties are best positioned to implement this regulatory change.

Keywords: Hedge Fund, Regulation, Systemic Risk

JEL Classification: G23, G28

Suggested Citation

Laura, Mehnaz and Fahad, Nafiz, Would Hedge Fund Regulation Mitigate Systemic Risk? Direct vs. Indirect Regulation Approach (May 13, 2017). International Business Research, 10(8), pp. 31-43, 2017, Available at SSRN: https://ssrn.com/abstract=2998048 or http://dx.doi.org/10.2139/ssrn.2998048

Mehnaz Laura

Jahangirnagar University - Department of Accounting and Information Systems ( email )

Dhaka
Bangladesh

Nafiz Fahad (Contact Author)

Auckland University of Technology (AUT) ( email )

55 Wellesley Street East
Auckland
New Zealand

Independent University, Bangladesh (IUB) - School of Business ( email )

Plot 16 Block B, Aftabuddin Ahmed Road Bashundhara
Bashundhara R/A
Dhaka, 1229
Bangladesh

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