The aim of this PhD thesis is to analyze the history and current situation of hedge funds and assess their
potential to destabilize financial markets. The findings of the analysis are used to validate the assumptions
underlying the major regulatory changes of hedge funds in the key global economic centres after the
financial crisis in 2008 and 2009. Since their inception early last century hedge funds have gone through a
period of great expansion in the sixties, followed by a decline due to large losses sustained in the early
seventies. The nineties meant a real breakthrough for hedge funds as a result of which they became
prominent players in the alternative investment space. As of today, there is over ten thousand hedge funds
that globally manage close to 3 trillion US dollars. Compared to mutual funds and other financial
institutions the volume of assets under management is still relatively small, the rate of growth over the
past fifteen years has however been very significant. What is emphasized with respect to the impact of
hedge funds on financial markets is the contribution to increasing the liquidity and efficiency and their
role on the financial derivatives market where hedge funds are actively involved in the transfer of risk.
They are at the same time subject of criticism for their purported destabilizing effect on financial markets
and contribution to fluctuations in the prices of investment instruments. Although the share of hedge
funds in triggering major financial crises has not been conclusively established, these investment entities
were one of the targets of the wide-ranging regulatory changes following the financial crisis of 2008 and
2009. The dissertation first discusses the history and current situation of hedge funds and defines the term
hedge fund. The following section describes the basic characteristics and principles of their functioning
and reviews the regulation in the major domiciles. The final chapter is focused on the empirical analysis
of the impact of hedge funds on financial markets. The inputs for this analysis include a global hedge
fund index and representative market indices and data from the CFTC on positions in the 10 year US
government treasury note futures. In the first step the descriptive statistics for the transformed time series
are presented. The second part of the analysis focuses on lagged correlations between returns and
volatility of the global hedge fund index and representative market indices. Granger causality tests are applied in the following section to determine the relationships between the returns and volatility of hedge
fund and representative market indices. In the final step of the analysis Granger causality tests are used to
analyze the link between the changes in positions in the 10-year US treasury note futures held by hedge
funds and the change in settlement prices of these futures with the aim to assess whether hedge funds
have the capacity to move the market. In conclusion, the results of this analysis are discussed in light of
the recent regulatory changes and the potential for the future growth of hedge funds is assessed. |