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Economic Crises Case Study

Case Title:

US Hedge Funds: Destabilising the Global Economy?

Publication Year : 2010

Authors: D Jha, D Arora and S Gollapalli

Industry: Banking, Insurance and Financial Services


Case Code: ECC0054IRC

Teaching Note: Not Available

Structured Assignment: Not Available

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The emergence of hedge funds was hailed as a true representation of the extent of financial liberalisation. These funds, with the aim of 'hedging' or spreading the risks across instruments and markets, brought about higher levels of liquidity, market efficiency, profitability and maturity to the financial markets, both in US and worldwide. Their cross-border dealings were seen as beacons of financial integration. On the flip side, their role was suspected of causing the Asian currency crisis of 1998, as well as the withdrawal of Britain from the European Exchange Rate Mechanism. Further, failure of mammoth funds such as Amaranth, Long Term Capital Management and such like, had occurred owing to inadequate diversification and excessive speculation, and an investigation of their role in the increased trading of exotic financial derivatives, eventually leading to the financial crisis of 2008, was ordered. Given the fact that these hedge funds are largely unregulated and are created for the purpose of profit-making, questions are raised as to whether hedge funds are destabilising the global economy?

Pedagogical Objectives:

  • To understanding the concept, structure and working of hedge funds.
  • To outlining the various hedge fund strategies and risks involved.
  • To examining the role of hedge funds in financial turmoils and impairing the stability of the global economy.

Keywords :  US hedge funds, Alternative investment strategy, US financial crisis, Asian currency crisis, Regulation, Hedge funds failures, Hedge funds and global economy, Global financial markets, Foreign investors, Speculators, George Soros, LTCM (long term capital management) collapse, Amaranth, Financial market manipulation, Systemic meltdown

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