The Contribution of Hedge Funds to the Systemic Instability of Financial Markets: Aspects from the
Financial Crisis of 2008

Abstract

This article analyzes the contribution of hedge funds to crises and instability in global markets. The author finds that loose regulations and opportunistic abuse of leverage instruments lead to market failure. The correlation of asset positions on an increasingly efficient capital market and the resulting counter-party risk may fuel downward spirals which even pose a threat to the real economy. This setting leads to significant systemic risks as a consequence of instrument and balance sheet leverage. The author argues that international legal regulations demanding more transparency and adequate accounting standards reflecting value at risk could stabilize global markets. Hedge funds could return or continue to be market makers and serious investors in a global economy. The author analyzes different hedge funds strategies and their contribution to three global crises during the last decade, with a strong emphasis on the financial crisis of 2007–2008.