Editing Hedge fund (section)

===Systemic risk===
[[Systemic risk]] refers to the risk of instability across the entire [[financial system]], as opposed to within a single company. Such risk may arise following a destabilizing event or events affecting a group of [[financial institution]]s linked through investment activity.<ref name=NBER>{{cite journal |doi=10.3386/w11200 |title=Systemic Risk and Hedge Funds |last1=Chan |first1=Nicholas |last2=Getmansky |first2=Mila |last3=Haas |first3=Shane M |last4=Lo |first4=Andrew W |date = March 2005 |journal=NBER Working Paper No. 11200 |doi-access=free }}</ref> Organizations such as the [[European Central Bank]] have charged that hedge funds pose systemic risks to the financial sector,<ref>{{cite web |url=http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf |title=Financial Stability Review June 2006 |date=June 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110629095405/http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf |archive-date=29 June 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news|url=http://business.timesonline.co.uk/tol/business/economics/article670960.ece|title=ECB warns on hedge fund risk|first=Gary|last=Duncan|author-link=Gary Duncan|newspaper=The Times|date=2 June 2006|access-date=1 May 2007|location=London|archive-url=https://web.archive.org/web/20110611232029/http://business.timesonline.co.uk/tol/business/economics/article670960.ece|archive-date=11 June 2011|url-status=dead|df=dmy-all}}</ref> and following the failure of hedge fund [[Long-Term Capital Management]] (LTCM) in 1998 there was widespread concern about the potential for systemic risk if a hedge fund failure led to the failure of its counterparties. (As it happens, no financial assistance was provided to LTCM by the [[US Federal Reserve]], so there was no direct cost to US taxpayers,<ref>{{cite magazine |last=Bookstaber |first=Richard |url=http://www.time.com/time/business/article/0,8599,1653556,00.html |title=Blowing up the Lab on Wall Street |magazine=[[Time (magazine)|Time]] |date=16 August 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20101206061830/http://www.time.com/time/business/article/0,8599,1653556,00.html |archive-date=6 December 2010 |url-status=dead |df=dmy-all }}</ref> but a large [[bailout]] had to be mounted by a number of financial institutions.)

However, these claims are widely disputed by the financial industry,<ref>{{cite web |url=http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf |title=A reply to the ECB's statement on hedge funds by the EDHEC Risk and Asset Management Research Centre |work=edhec-risk.com |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20090919163149/http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf |archive-date=19 September 2009 |url-status=dead |df=dmy-all }}</ref> who typically regard hedge funds as "[[Too big to fail|small enough to fail]]", since most are relatively small in terms of the assets they manage and operate with low leverage, thereby limiting the potential harm to the economic system should one of them fail.<ref name=mallaby>{{cite book |title=More Money Than God: Hedge Funds and the Making of a New Elite |last=Mallaby |first=Sebastian |year=2010 |publisher=Penguin Group |isbn=978-1-59420-255-1|title-link=More Money Than God: Hedge Funds and the Making of a New Elite }}</ref><ref>{{cite news |title=No Threats Here, Firms Tell the U.S. |first=Ben |last=Protess |url=https://dealbook.nytimes.com/2010/11/19/no-threats-here-financial-firms-tell-u-s/ |newspaper=The New York Times |date=19 November 2010 |access-date=28 March 2011 |archive-url=https://web.archive.org/web/20101125044716/http://dealbook.nytimes.com/2010/11/19/no-threats-here-financial-firms-tell-u-s/ |archive-date=25 November 2010 |url-status=live |df=dmy-all }}</ref> Formal analysis of hedge fund leverage before and during the [[2008 financial crisis]] suggests that hedge fund leverage is both fairly modest and [[counter-cyclical]] to the market leverage of investment banks and the larger financial sector.<ref name=AngGorovyy>{{cite journal |last1=Ang |first1=Andrew |last2=Gorovyy |first2=Sergiy |last3=van Inwegen |first3=Gregory B. |year=2011 |title=Hedge Fund Leverage |journal=Journal of Financial Economics |volume=102 |issue=1 |pages=102–126 |doi=10.1016/j.jfineco.2011.02.020 |s2cid=15596157 }}</ref> Hedge fund leverage decreased prior to the [[2008 financial crisis]], even while the leverage of other financial intermediaries continued to increase.<ref name=AngGorovyy/> Hedge funds fail regularly, and numerous hedge funds failed during the [[2008 financial crisis]].<ref>{{cite news |title=Hedge fund graveyard: 693 and counting |first=Ben |last=Rooney |url=https://money.cnn.com/2008/12/18/news/economy/hedge_fund_liquidations/?postversion=2008121817 |work=CNNMoney.com |date=18 December 2008 |access-date=5 April 2011 |archive-url=https://web.archive.org/web/20120119043803/http://money.cnn.com/2008/12/18/news/economy/hedge_fund_liquidations/?postversion=2008121817 |archive-date=19 January 2012 |url-status=live |df=dmy-all }}</ref> In testimony to the [[United States House Committee on Financial Services|US House Financial Services Committee]] in 2009, [[Ben Bernanke]], the [[Federal Reserve System|Federal Reserve]] Board Chairman said he "would not think that any hedge fund or private-equity fund would become a systemically critical firm individually".<ref>[http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg55809/pdf/CHRG-111hhrg55809.pdf ''Federal Reserve Perspectives on Financial Regulatory Reform Proposals: Hearing Before the H. Comm. on Financial Services''] {{Webarchive|url=https://web.archive.org/web/20131228040910/http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg55809/pdf/CHRG-111hhrg55809.pdf |date=28 December 2013 }}, 111th Cong. 25 (2009) (testimony of Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System).</ref>

This does leave the possibility that hedge funds collectively might contribute to systemic risk if they exhibit [[Herd behavior|herd or self-coordinating behavior]],<ref name="self-coordinating behaviour">{{cite web |last1=Systemic Risk Centre |title=Engineering and the financial system |date=20 July 2015 |url=https://issuu.com/lsesrc/docs/src_final_july_2015?e=17950101/14294828 |access-date=27 November 2021 |archive-date=27 November 2021 |archive-url=https://web.archive.org/web/20211127110413/https://issuu.com/lsesrc/docs/src_final_july_2015?e=17950101/14294828 |url-status=live }}</ref> perhaps because many hedge funds make losses in similar trades. This coupled with the extensive use of leverage could lead to forced liquidations in a crisis.

Hedge funds are also closely connected to their prime brokers, typically investment banks, which could contribute to their instability in a crisis, though this works both ways and failing [[counterparty]] banks can freeze hedge funds assets, as [[Lehman Brothers]] did in 2008.<ref>{{cite book| last=Coggan| first= Philip| title= Guide to Hedge Funds| orig-year= 2008| year= 2010| publisher = The Economist| isbn= 978-1-84668-382-4| pages= 85–89}}</ref>

An August 2012 survey by the [[Financial Services Authority]] concluded that risks were limited and had reduced as a result, ''inter alia'', of larger [[margin (finance)|margin]]s being required by counterparty banks, but might change rapidly according to market conditions. In stressed market conditions, investors might suddenly withdraw large sums, resulting in forced asset sales. This might cause liquidity and pricing problems if it occurred across a number of funds or in one large highly leveraged fund.<ref>
{{cite web|url= http://www.fsa.gov.uk/static/pubs/other/hedge-fund-report-aug2012.pdf|title= Assessing the possible sources of systemic risk from hedge funds|publisher = Financial Services Authority|date= August 2012|access-date= 18 July 2013|archive-url= https://web.archive.org/web/20121110212234/http://www.fsa.gov.uk/static/pubs/other/hedge-fund-report-aug2012.pdf|archive-date = 10 November 2012|url-status = live|df= dmy-all
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