When skittish hedge fund investors and lenders become a problem for everyone
Nov 19th, 2009 | Filed under: Hedge Fund Operations and Risk Management, Hedge Fund Regulation, Today's Post
Back in 2007, we told you about a paper (and subsequent presentation to CAIA’s Swiss Chapter by one of the authors) that explored the pathways followed by so-called “hedge fund contagion”.
Then, last August, we told you about a paper by John Dai and Suresh Sundaresan of Capula Investment Management called “Risk Management Framework for Hedge Funds: Role of Funding and Redemption Options on Leverage”. In it, Dai and Sundaresan argue that a hedge fund essentially sells an option to each of its investors and lenders (e.g. prime brokers) since both parties are free to pull the plug on their support (although investors often face extensive waiting periods).
Now, a new working paper by Benjamin Klaus and Bronka Rzepkowski of the European Central Bank called “Risk Spillover Among Hedge Funds” combines these two concepts by blaming hedge fund contagion on both investor redemptions and “tightening financial conditions” precipitated by prime brokers.
Being central bankers, the authors also propose several policy prescriptions. So you may want to check out this report if you’re trying to forecast how the Europeans – and potentially the Americans – are going to tackle hedge fund regulation. More…
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