Systemic risk

Though it is a huge concern to those who lost money through Madoff's fraud and deceit, I hope it doesn't result in additional regulation. Buyer beware! I certainly do not want the government to stand in the way of individuals who want to take additional risk for the opportunity to make abnormally high returns. The real issue with hedge funds is the risk that one or more may pose the economy overall. Regulators should be more concerned with the possibility of another collapse like that of Long-term Capital Management in 1998. When hedge funds become so large, through either acquired assets or leveraging, to be able to adversely affect the entire economy, that is when regulators and other market participants need to worry. For all the good globalization has brought to the world, it has definitely reduced the benefits of diversification and increased the probability that isolated adverse events can become viral.

Posted by: John Taylor

13 Dec 2009 | 21:29