So argues a study published April 14 by Reint Gropp, a visiting scholar at the Federal Reserve Bank of San Francisco. It attempts to measure how deterioration in financial conditions spreads through various corners of the financial system.
Gropp’s findings show that while the risks to other financial institutions emanating from hedge funds are as small as those from commercial or investment banks in calm times, they are greater during periods of market turbulence.
A 1 percentage point increase in the risk of a hedge fund is estimated to weaken the position of investment banks by 0.09 point in normal market conditions. In times of financial distress, the same shock increases the impact by 0.71 percentage point, according to Gropp.
“There is a growing recognition that hedge funds are systemically important,” he said. more »