1 – e c o n o m i c c o m m e n t a r i e s n o . 3 , 2 0 0 9
2 5 m a r c h 2 0 0 9
no. 3, 2009
hedge funds and the financial
crisis of 2008
the author works in the Financial stability Department.
a discussion of the role played by hedge funds in developments on the financial
markets, and to what extent they are affected by the effects of the crisis, is a recurring
feature of every financial crisis. Generally speaking, hedge funds have coped well in
periods of financial turbulence. Unlike previous financial crises, however, the current
turbulence has had a major impact on the hedge funds. the downturn has affected
most types of asset and most markets and this has reduced the positive effects of
the diversification in the hedge funds’ portfolios. moreover, several countries have
prohibited the shortselling of shares, which has had a negative effect on the funds’
arbitrage strategies. this economic commentary discusses how the hedge fund
market has been affected so far by the current financial crisis.
”hedge fund” is a collective term for different types of investment fund. a common
feature of these funds is that they have absolute earnings targets, that is they set
targets for earnings irrespective of developments on, for example, the stock exchange.
hedge funds are primarily intended for institutional investors and financially-strong
private individuals. many hedge funds protect their investments against losses (so-
called hedging) although this does not apply to all funds. instead, hedge funds use a
wide range of investment strategies that are more dynamic compared to the strategies
used by traditional funds. this is possible because hedge funds are governed by a
more liberal regulatory framework that permits both long and short positions and
the use of derivatives.1 hedge funds can also choose to have a high level of leverage,
which can provide a higher return on the capital invested.
over the last ten years, the hedge fund market has grown