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August 13, 2006
Hedge Fund Collapse May Trigger Financial Debacle
If a hedge fund collapses, the banks that lend money to it, may collapse too. That might cause a chain reaction through the financial system. As a precaution, the banks can limit their exposure to hedge funds by monitoring the risks associated with hedge funds. Regulatory restrictions have encouraged the banks to become smarter. In some cases, the rules permit hedge funds to borrow more if they want to take extra risk.
Regulating hedge funds will prevent the insider trading and other sort of illegal manipulation. In the recent months, cases of fraud involving hedge funds have come into sight. The regulations might be able to tighten their control on all hedge fund activities. The law already allows regulators to go after hedge fund managers who commit financial frauds. It is yet to be seen whether the new regulations would be more helpful or not. Investor protection is the prime concern today. The failure of hedge funds may result in a huge financial debacle. If hedge funds are registered and inspected, it will prevent the loss of money for the investors.
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