Hedge Funds and Systemic Risk by Lloyd S. Dixon

Hedge Funds and Systemic Risk by Lloyd S. Dixon

CHAPTER ONE

Introduction

In the wake of the financial crisis of 2007–2008, investors and
policymakers alike have called for renewed attention to hedge funds
and their role in the financial system. In part, this interest has been
prompted by recent insider-trading scandals at the Galleon Group
hedge fund and other funds. However, the interest also derives
from deeper concerns about the role that hedge funds have come to
play within the financial system and about a regulatory framework
that may not effectively address the risk they pose to the financial
system. The concern was articulated by the chairperson of the U.S.
Securities and Exchange Commission (SEC) in 2009:
[T]he road to investor confidence requires a concerted
effort to fill the regulatory gaps that have become so
apparent over the last 18 months…. One of the most
significant gaps likely to be filled relates to hedge funds—
which have flown under the regulatory radar for far too
long. And without even a comprehensive database about
hedge funds and their managers, it is virtually impossible
to monitor their activities for systemic risk and investor
protection purposes.
Generally speaking, hedge funds cannot market their services to
the general public and must either solicit funds only from large
institutions and wealthy investors or limit ownership of their shares
to 100 investors. As a result, hedge funds have been exempt from
many reporting and other regulatory oversight requirements while
still being subject to restrictions against fraud. As opposed to many
other types of investment vehicles, such as mutual funds, hedge
fund managers are free to pursue any investment strategy they

Hedge Funds and Systemic Risk by Lloyd S. Dixon