TY  - JOUR
AU  - Chan, Nicholas
AU  - Getmansky, Mila
AU  - Haas, Shane M
AU  - Lo, Andrew W
TI  - Systemic Risk and Hedge Funds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11200
PY  - 2005
Y2  - March 2005
DO  - 10.3386/w11200
UR  - http://www.nber.org/papers/w11200
L1  - http://www.nber.org/papers/w11200.pdf
N1  - Author contact info:
Nicholas Chan

Mila Getmansky Sherman
Isenberg School of Management
Room 308C
University of Massachusetts
121 Presidents Drive, Amherst, MA 01003
Tel: 413-577-3308
Fax: 413-545-3858
E-Mail: msherman@isenberg.umass.edu

Shane M. Haas

Andrew W. Lo
MIT Sloan School of Management
100 Main Street, E62-618
Cambridge, MA  02142
Tel: 617/253-0920
Fax: 781/891-9783
E-Mail: alo-admin@mit.edu
M1  - published as Nicholas Chan, Mila Getmansky, Shane M. Haas, Andrew W. Lo. "Systemic Risk and Hedge Funds," in Mark Carey and René M. Stulz, editors, "The Risks of Financial Institutions" University of Chicago Press (2006)

AB  - Systemic risk is commonly used to describe the possibility of a series of correlated defaults among financial institutions---typically banks---that occur over a short period of time, often caused by a single major event. However, since the collapse of Long Term Capital Management in 1998, it has become clear that hedge funds are also involved in systemic risk exposures. The hedge-fund industry has a symbiotic relationship with the banking sector, and many banks now operate proprietary trading units that are organized much like hedge funds. As a result, the risk exposures of the hedge-fund industry may have a material impact on the banking sector, resulting in new sources of systemic risks. In this paper, we attempt to quantify the potential impact of hedge funds on systemic risk by developing a number of new risk measures for hedge funds and applying them to individual and aggregate hedge-fund returns data. These measures include: illiquidity risk exposure, nonlinear factor models for hedge-fund and banking-sector indexes, logistic regression analysis of hedge-fund liquidation probabilities, and aggregate measures of volatility and distress based on regime-switching models. Our preliminary findings suggest that the hedge-fund industry may be heading into a challenging period of lower expected returns, and that systemic risk is currently on the rise.
ER  -