The European Central Bank is wrong in concluding that hedge funds pose a significant risk to financial markets, said researchers at the Risk and Asset Management Research Centre of the EDHEC Business School.
EDHEC professors issued a statement today rebutting claims made in the ECB's June 2006 Financial Stability Review — a semi-annual publication of the bank's assessment of the stability of the eurozone financial system — that redemptions from hedge funds with increasingly large and similar positions in illiquid assets could cause "adverse effects" in world markets.
EDHEC researchers said in the statement that the ECB did not substantiate an "upward trend in illiquidity exposure," adding that "mechanisms such as lock-up periods effectively protect hedge funds against a mismatch between asset liquidity and funding liquidity."
EDHEC professors pointed out that in a study published in June 2005, the ECB itself concluded that "hedge funds have a role as providers of diversification and liquidity, and they contribute to the integration and completeness of financial markets."
