“Stringent rules for hedge funds make the financial system fragile” warns economics speaker Sebastian Mallaby
Writing in the Financial Times, Sebastian Mallaby, the best-selling author of “More Money Than God” (2010), has argued that the stabilising role of hedge funds is being “needlessly weakened” by regulators, through the creation of stringent rules, and by the hedge funders themselves.
Sebastian believes that “small-enough-to-fail hedge funds” provide an attractive alternative to the “too-big-to-fail banks”. Indeed, he demonstrates that even “Europe’s leaders have finally admitted that their economies would be more resilient if they had deeper capital markets and smaller banks.”
However, Sebastian notes that while hedge funds have grown more attractive to policy makers, they have become less appealing to their own clients due to lacklustre returns. This raises the possibility that “investors will yank their money out, crippling one of the few healthy features of the financial system.” He suggests that the “weakening performance may reflect regulators’ new aggression.”
He goes onto argue that “it is one thing to impose a regulatory burden when there is a clear need to do so…but it is another thing entirely to impose burdens on hedge funds, nearly all of which are far too small to threaten financial stability.”
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