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# 金融代写|对冲基金代写Hedge Funds代考|BUAD426 The Role of Hedge Funds in the Financial Markets

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## 金融代写|对冲基金代写Hedge Funds代考|The Role of Hedge Funds in the Financial Markets

We now examine the evidence on the impact of hedge funds on financial markets. Much of the early literature focuses on the increase in the number of hedge funds (Getmansky et al., 2004). Over the period from the late 1980 s to the late 1990 , worldwide demand for hedge funds grew due to outperformance, diversification benefits relative to a set of benchmarks, and access to a wide variety of financial products unavailable to traditional investors (Jame, 2012).

This brings us to the question about the benefits of hedge funds for financial markets. They are important contributors of liquidity in the bond and securities markets (Agarwal et al., 2011). This can be attributed, in part, to the higher trading turnover of hedge funds compared to other market participants. For example, it has been suggested that the hedge fund industry’s share of trading turnover is much greater-due to its quantitative trading strategies and reliance on leverage-than its share of assets under management $(\mathrm{OECD}, 2007)$. This may lead to price discovery and market efficiency (Brunnermeier and Nagel, 2004). Moreover, hedge funds employ many different investment strategies, for example, strategies such as equity market neutral guarantee liquidity through continuously active trading (Muhtaseb, 2013). Similarly, hedge funds benefit from providing liquidity in niche markets, thereby profiting from the reluctance of others to invest in illiquid or narrowly focused strategies (Brophy et al., 2009), although there is evidence that hedge funds seem to reduce their market exposure during periods of low liquidity (Cao et al., 2011). Recent experience suggests that hedge funds are more likely to pursue other strategies, such as global macro, fund of funds, and managed futures, which are more profitable during liquidity crises (Ben-David et al., 2011).
The rapid increase in hedge fund stock ownership in the past decades has contributed to the improved informational efficiency of stock prices (Cao et al., 2017). Hedge fund managers use strategies to exploit the price differences of a security or instrument between different markets. It is important to note that while hedge funds’ arbitrage activities may reduce the effective cost of trading, leveraged arbitrageurs, employing the identical strategy, are able to eliminate arbitrage opportunities. This strategy may lead to overcrowded trading in periods of stress and increases in the effective cost of trading (Cao et al., 2017).

At the same time, scholars have sought to show that hedge funds perform better in volatile financial markets. In many cases, however, higher volatility is associated with lower returns. These studies have revealed that one way in which hedge funds might perform better is through employing short strategies. Moreover, in markets with lower volatility, hedge funds are more likely to receive a demand to unwind their positions due to breaching internal limits than they are to benefit from leverage (Gabaravicius and Dierick, 2005).

In sum, there is good evidence that hedge funds benefit financial markets by providing liquidity in both bond and equity markets. The size of the hedge fund industry’s trading turnover is also likely to lead to price discovery and market efficiency. Given their impact on the financial markets, regulators are increasingly more focused on the external effects of hedge funds on markets and investors.

## 金融代写|对冲基金代写Hedge Funds代考|Hedge Funds and Corporate Governance: Change in Regulation

Our discussion so far has focused on hedge funds’ performance and their impact on financial markets. This brings us to the question about the influence of regulation on the performance of hedge funds. Until recently, hedge funds were subject to less regulatory scrutiny than the rest of the asset management industry. The US regulatory regime for hedge funds remained, despite the brief registration requirement in 2006 , a largely unregulated environment compared to the disclosure and registration requirements in other jurisdictions.

Evidence suggests that investors entering into contracts with hedge funds may be vulnerable to the opportunistic conduct of fund managers. Such conflicts often arise due to the high degree of information asymmetries between fund managers and investors (Cumming et al., 2013). To deter this threat, investors typically rely on an efficient combination of due diligence and monitoring. Offering fund managers incentives by linking fees to performance and requiring co-investment provides an important mechanism to address potential conflicts of interest and managerial abuse issues. However, many institutional investors have limited capacity and incentives to benchmark and monitor fund managers’ activities. Accordingly, the framework for monitoring investmen activities and performance is likely to affect the selection of fund managers.

In the US and elsewhere, regulators have made progress in addressing the agency problems and other risks identified in the wake of the global financial crisis. The US, under the Dodd-Frank Act of 2010, introduced two notable developments. First, on the compliance side, registered investment advisors are required to adopt written compliance procedures, designate a chief compliance officer, maintain books for at least five years, adopt an ethics code, and follow guidelines on fees and relationships with third parties soliciting clients. Through both routine and for-cause inspections, the SEC monitors extensive recording-keeping requirements covering both advisors and funds. Regulated funds and advisors are required to disclose, annually, Form ADV filings that supply disclosures on investment style, investors, managers, assets under management, fees, accounting practices, and disciplinary history.

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