Hedge funds are not like most other types of investors in contemporary financial markets; they are among the few kinds of actors that are able to move and shake markets from time to time. BlackRock and Vanguard, for instance, are giant asset managers – each … having more AUM than the entire hedge fund industry – but they do not seek to move markets, since the vast majority of their funds are index trackers. They could be likened to huge oil tankers that slowly cruise with the market. Many hedge funds, on the other hand, are more like agile and aggressive speed boats that race towards openings and opportunities – even if that means that other slower boats get into trouble. Occasionally, hedge funds have even been able to threaten the navigability of entire waterways with their trading strategies (i.e., impairing financial stability). Of course, every analogy has its limits, but what I would like to highlight with this is that hedge funds should be an important issue for researchers. Moreover, whenever a domestic financial regulator or international organization such as the IMF writes about financial stability risks, they invariably find themselves highlighting a potential role hedge funds might play. This does tend to indicate there is an issue with how they are regulated.

 

(Fichtner 2023)

 

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