Are hedge funds systemically important?

Gregory W. Brown, Jeremiah Ross Green, John R.M. Hand

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Using a proprietary and unusually comprehensive database of hedge fund returns, we seek to identify abnormal performance consistent with opportunistic trading (e.g., bear raids) or synchronized actions (e.g., widespread forced liquidations) that could generate systemic risk. We find no evidence that hedge funds systematically benefit from opportunistic trading. In contrast, some funds operating with strategies that commonly utilize leverage (e.g., f ixed income arbitrage and event-driven strategies) perform significantly worse than would be expected given ex ante risk-factor loadings. This suggests that forced liquidations probably caused some funds to sell into a falling market at fire-sale prices. However, underperformance is not concentrated in specific funds that use leverage or during the height of the systemic risks in September 2008, indicating that selling pressure likely derives from meeting redemptions versus forced selling during the crisis. These results suggest new policies regulating hedge funds should focus on certain fund-level risks instead of strategy or industry risk s.

Original languageEnglish (US)
Pages (from-to)8-25
Number of pages18
JournalJournal of Derivatives
Volume20
Issue number2
DOIs
StatePublished - Dec 1 2012

Fingerprint

Hedge funds
Leverage
Liquidation
Systemic risk
Risk factors
Income
Factor loadings
Underperformance
Arbitrage
Data base
Industry

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

Brown, G. W., Green, J. R., & Hand, J. R. M. (2012). Are hedge funds systemically important? Journal of Derivatives, 20(2), 8-25. https://doi.org/10.3905/jod.2012.20.2.008
Brown, Gregory W. ; Green, Jeremiah Ross ; Hand, John R.M. / Are hedge funds systemically important?. In: Journal of Derivatives. 2012 ; Vol. 20, No. 2. pp. 8-25.
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Brown, GW, Green, JR & Hand, JRM 2012, 'Are hedge funds systemically important?', Journal of Derivatives, vol. 20, no. 2, pp. 8-25. https://doi.org/10.3905/jod.2012.20.2.008

Are hedge funds systemically important? / Brown, Gregory W.; Green, Jeremiah Ross; Hand, John R.M.

In: Journal of Derivatives, Vol. 20, No. 2, 01.12.2012, p. 8-25.

Research output: Contribution to journalArticle

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