The political economy of hedge fund regulation

Abstract

The currency crises and episodes of market unrest of the 1990s sparked a series of regulatory initiatives to reform the Global Financial Architecture. One of these initiatives tackled the activities of hedge funds, a type of investment vehicle that was frequently cited as one of the causes of these crises. The key research question of this thesis is why efforts to regulate an apparently destabilising aspect of financial markets failed, despite the setting up of an ad hoc forum at the international level (the Financial Stability Forum) and various domestic initiatives in the US, the country where most hedge funds operate. The thesis develops a theoretical framework that examines this regulatory inaction through three explanatory models. The first model draws upon mainstream economic accounts and argues that the empirical evidence did not justify more interventionist public regulation of hedge funds. The second model assumes that a form of relational power has been exercised at the regulatory table: those actors with an interest in leaving hedge funds unregulated prevailed over those that favoured a more mandatory approach. The third model argues that it was not just relational power that determined outcomes, but mainly the power of the structure of meaning within which discussions took place and problems were framed. This structure of meaning led to a particular formulation of the problem at stake, which excluded other concerns and actors from the regulatory agenda. Each model is analysed for its policy implications. The first model leads to regulatory solutions that rely upon private actors' due diligence and self-assessment of risk. The second model leads to policy options that favour a greater inclusion of developing countries and other stakeholder groups in decision-making processes in global finance. The third model leads to a rethinking of the very tenets of financial market regulation and of the financial theories used to explain and govern the market. The thesis argues that the third model is better able to grasp the complexity of power beyond the seemingly technical nature of financial regulation. For this reason, it is deemed more suitable to provide policy solutions that challenge the current neo-liberal framework of regulation