Regulering af hedgefonde: En analyse af hvordan regulering af transparens og gearing indvirker på finansiel stabilitet

Christian Sahlertz

Student thesis: Master thesis

Abstract

This thesis characterizes hedge funds as complex and heterogeneous investment forms, which cannot be defined explicitly. The legal form is residually based upon exemptions in national regulation with different variations across the jurisdictions. New York and London are the two major jurisdictions from where hedge funds operate, whereas this thesis limits its focus hereto. This thesis deals with hedge funds’ potential adverse influence on financial stability. It is found that hedge funds may adversely influence financial stability by having systemic risks, which may constitute a threat to the greater economy, as the financial system forms a vital part hereof. Such systemic risks can be divided into counterparty, investor and third party risks. The primary focus is on whether or not systemic risk may be reduced through regulation to achieve a higher level of transparency or by limiting the access to financial leverage. It is found that more transparency or limitation of leverage will not necessarily provide financial stability. Regulation of transparency is based upon a trade-off between minimizing systemic risk in terms of liquidation of hedge funds and increase of systemic risk in terms of hedge funds not being represented on the financial markets. It is found that the level of transparency must take both effects into consideration and the most efficient way is sought to be through a mandatory disclosure of material information to the market. The market will have sufficient information available in order to make efficient capital allocations, which will lower the risk of liquidation of hedge funds and still ensure the means of hedge funds’ existence, and consequently create a greater level of financial stability. Regulation of leverage is based upon a similar trade-off as that of transparency. Leverage is a definite segment used by hedge funds, which constitutes systemic risk in terms of liquidation of hedge funds, but also increases systemic risk, as leverage is vital to ensure the well functioning of the investment strategies, that are at the heart of hedge funds, which creates efficiency in the markets where hedge funds operate. It is found very difficult or even impossible to define a certain level of leverage to be determined in such trade-offs, as leverage is constituted by several different forms and are used diversely throughout the hedge fund industry. Instead regulation of the providers of leverage and of the products, which embed leverage are sought to balance the trade-off more efficiently and thereby creating a greater level of financial stability. Furthermore, this thesis finds that regulation must be drafted on a common understanding and objective as hedge funds are internationally based and may very likely shift base of origins without any delay. It is sought necessary to amend current regulation in the US due to a high rulebased system, whereas the UK may alter its interpretation of current regulation due to a high principle-based system, in order to create the same regulation within these two very important jurisdictions.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2010
Number of pages96