Hedge Funds, Financial Intermediation, and Systemic Risk

32 Pages Posted: 22 Jun 2007  

John Kambhu

Federal Reserve Bank of New York

Kevin J. Stiroh

Federal Reserve Bank of New York

Til Schuermann

Oliver Wyman

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2007

Abstract

Hedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark against financial market disruptions with potential systemic consequences has been the set of counterparty credit risk management (CCRM) practices by the core of regulated institutions. The characteristics of hedge funds make CCRM more difficult as they exacerbate market failures linked to agency problems, externalities, and moral hazard. Nonetheless, we conclude that CCRM remains the best line of defense against systemic risk and that direct regulation of hedge funds is not desirable.

Keywords: banks, counterparty credit risk management, liquidity

JEL Classification: G12, G21

Suggested Citation

Kambhu, John and Stiroh, Kevin J. and Schuermann, Til, Hedge Funds, Financial Intermediation, and Systemic Risk (August 1, 2007). Available at SSRN: https://ssrn.com/abstract=995907 or http://dx.doi.org/10.2139/ssrn.995907

John Kambhu

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Kevin J. Stiroh

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6633 (Phone)
(212) 720-8363 (Fax)

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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