Research Handbooks in Financial Law series
Edited by Barry Rider
Chapter 12: Transparency and responsibility: recent developments in the regulation of hedge funds in the US and the EU
Following the financial turmoil which swept through markets worldwide in 2007 and 2008 the role of hedge funds in contributing to this crisis has been widely debated. This is due in part to the collapse in June 2007, of two hedge funds managed by Bear Stearns. These funds, which were heavily invested in securities backed by sub-prime mortgages, were forced to mark down the value of these mortgages due to increasing defaults sparked by the decline in the housing market in the US and elsewhere. While these hedge funds were liquidated without causing serious market disruptions, they served to alert investors to the immense financial clout which they possessed and played a part in the collapse of Bear Stearns in March 2008. Since that time, many financial analysts have noted that hedge funds have played a major role in the increasing volatility in the financial market which occurred throughout 2008 and may have contributed to the “flash crash” of 6 May 2010 in which shares on US exchanges dropped dramatically in a matter of minutes with some blue chip shares briefly trading for mere pennies per share. Although the crash was ultimately determined to have been caused mainly by rapid high frequency computerized trading, some commentators initially blamed it on liquidation of the large holdings by hedge funds.
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