Research Reveals: hedge funds have a dramatic impact on financial institutions

Hedge funds can bring about big shocks in times of crises, because the risks they conduct have a bigger role than those of insurance companies and other financial institutions. These funds were determined to have been only a minor influence in the financial crisis of 2007-2008, and because of that banks and insurance companies have experienced far more regulatory repercussions than hedge funds.

A study led by finance professor Reint Gropp, of Goethe University, contends that hedge funds should be considered as having more significance than other institutions. The study looked carefully at how difficulties in a financial institution can affect other areas, in particular that hedge funds have a large impact on banks and insurance companies during times of crises.Typical market circumstances show that a one-point increase in hedge fund value-at-risk causes an increase of just under one point in banks. The numbers were much higher in times of financial crises. Reint determined that the funds may be even more obtrusive than was generally believed before. If assets of these funds are erased during times of financial distress, it could cause additional delinquencies that may have a negative effect on other institutions.The European Central Bank (ECB), along with the Bundesbank, talked about Gropp’s study. However, the United States has not really given it much consideration at this time, though the funds are of substantial value in the system. More information will be needed before the comprehensive risk can see improvement, and there is an increasing awareness of that.

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