Hedge Funds Actually Riskier, Scarier Than Banks, Vladimir Putin, Earth-Bound Asteroids Combined

Author:
Updated:
Original:

Sayeth a German academic, contra everything that every hedge fund lobbyist has said (and that everybody believed) since 2007.

Hedge funds, on the other hand, adversely affect all three other types of financial institutions. During crises, the spillovers become very large, making hedge funds more important transmitters of shocks than commercial banks or investment banks….

Hedge funds are opaque and highly leveraged. If highly leveraged hedge funds are forced to liquidate assets at fire-sale prices, these asset classes may sustain heavy losses. This can lead to further defaults or threaten systemically important institutions not only directly as counterparties or creditors, but also indirectly through asset price adjustments (Bernanke 2006)….

during more volatile market conditions, the effects from shocks are striking, particularly those from shocks to the hedge fund industry. Adverse conditions in hedge funds increase the risk in all other types of financial institutions, even when shocks to other industries remain small. During crisis times, shocks from hedge funds have substantial effects on all three other types of financial institutions we study. The largest impact appears to be on investment banks, which experience a spillover response around three-quarters the size of the initial shock to the hedge fund industry.

How Important Are Hedge Funds in a Crisis? [FRBSF Economic Letter]

Related

Vladimir Putin's Ex-Hedge Fund Buddy Pens Memoir

"When the Russian government turns on you, it doesn’t do so mildly."

By US Coast Guard [Public domain], via Wikimedia Commons

‘Whale Rock’ Not A Parody Hedge Fund Name, But Actual Firm Actually Killing It

And actually proving that investors can’t resist a hedge fund named for heavy things.

People Still Launching Hedge Funds Faster Than They Can Fail

Well, the numbers are finally in for 2012 and it was, relatively speaking, a bloodbath for hedge funds, with more going to their grave or down the drain than in 2010 or 2011. But there were still 235 more hedge funds at the end of the year than at its beginning, because those who have previously shuttered a hedge fund due to their failure to raise/make enough money gave it another go last year. Look for more of the same this year, as fresh-faced and not-so-fresh-faced hedge fund managers hang out a new shingle for a few months, only to find out that investors are only interested in having Ray Dalio manage their money.

By Photograph: en:User:Anubis3Medal: Gustav Vigeland (Self-photographed) [GFDL, CC-BY-SA-3.0 or Public domain], via Wikimedia Commons

Nobel-Pickers Better Hedge Fund Managers Than Nobel Winners

Robert Merton and Myron Scholes know what we're talking about.