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STUDENT ID No: 120013143(If group coursework, please list all ID Nos.)

MODULE CODE: MN3202

SCHOOL OF MANAGEMENTUndergraduate Programmes

MODULE TITLE: Research Methods II

TOPIC/ASSIGNMENT TITLE: Is the current regulatory framework concerning hedge funds appropriate for the safeguard of the wider financial system, and for the continued prof-itability of the industry?

MODULE COORDINATOR: Dr Tobias Jung

WORD COUNT: 5544(Tables, even those input as images, will be counted as part of the word count)

DEADLINE DATE: 1st May 2015

In submitting this assignment I hereby confirm that:

• I have read and understood the University’s policy on academic misconduct.• I confirm that this assignment is all my own work.

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• I confirm that in preparing this piece of work I have not copied any other person’s work, or any other pieces of my own work.

• I confirm that this piece of work has not previously been submitted for assessment on another programme.

ContentsLiterature Review3. Introduction

4. Historic Financial Services Regulation

6. Post-Crisis Financial Services Regulation

8. Historic Hedge Fund Regulation

10. Post-Crisis Hedge Fund Regulation

12. Summary of the Literature

Research Methodology

13. Motivation

13. Research Question

13. Sociological Standpoints

14. Specific Approach

15. Limitations

15. Sample

16. Measurement Tool

16. Proposed data analysis

16. Reliability and Validity

18. Conclusion

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Research Question:

Is the current regulatory framework concerning hedge funds appropriate for the safeguard of the

wider financial system, and for the continued profitability of the industry?

Literature review

Introduction Regulation of the financial services industry has been a particularly fluid and dynamic chal-

lenge over the course of recent history. Regulators have had to innovate and expand their remit in

order to include the regulation of new and complex debt instruments, as well as various other new

financial products. They have had to make sense of the crippling worldwide financial crisis, and in

many cases have had to re-structure in order to comply with legislative changes enacted to prevent

its reoccurrence. Academic literature specifically concerning the regulation of hedge funds is lim-

ited and challenging to acquire. There are many reasons for this lack of research, such as their in-

famously covert nature, as well as their status generally as private entities that are not required to

release technical information publicly. In order to conduct an appropriately thorough literature re-

view that will enable one to prepare to embark on a research question based on the appropriate-

ness of the regulation of hedge funds, it is essential to first look more broadly at the regulation of

the financial services sector, and how it has changed historically and over this recent period of de-

velopment. Through looking at these changes in the financial sector as a whole, a more compre-

hensive understanding of how hedge funds fit into the wider puzzle will be obtained. What will also

become clear, is the differing extent to which hedge funds are and have been regulated in compari-

son to other financial institutions such as banks and insurance companies.

As 60% of hedge fund managers are located in North America (Preqin, 2014), and the ma-

jority of these are in the United States, the literature reviewed will focus primarily on US Financial

Regulation.

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Historic Financial Services RegulationThe cornerstone of the regulation of financial services in the United states was laid down in

1913, with the signing of the Federal Reserve act, creating for the first time, an institution capable

of currency manipulation, rediscounting commercial paper, and crucially regulating the banking

sector (Meltzer, 2010). There had long been a distaste for a central bank in the United States, dat-

ing back to the founding fathers themselves, however after a period of 80 years without a ‘first

bank’, it was deemed necessary to create one for the sake of long term economic stability.

The most substantial piece of regulatory legislation following the Federal Reserve Act was

the Glass-Steagall act of 1933. The legislation was passed as a response to the great depression,

and acted to “remove commercial banks from the securities underwriting business” (Kroszner &

Rajan, 1994) as well as creating federal deposit insurance. This essentially was the separation of

commercial and investment banking activities, which coincidently is a policy consideration that was

deliberated in the wake of the recent financial crisis. However, it’s applicability seemingly did not

transcend the economic fluctuations of the twentieth century, as the act was repealed in 1999.

Isaac and Fein (1988) celebrate the effect the Glass-Steagall act had on the financial sec-

tor. They argue that the legislation “Insulated the banking system from competitive pressures and

perceived threats”. There are many academic proponents of the idea of separating investment and

commercial banking, with the main argument being the mitigation of conflicts of interest between

depositors and the bank. The law prevented banks who accepted deposits from engaging in risk-

taking speculation when it came to securities (Sekar, 2014). Benston (1989) claimed that there was

a risk of the government safety net (comprising deposit insurance, lender of last resort and govern-

ment intervention) being strained in the event of banks engaging in securities activities. The imple-

mentation of the Glass-Steagall act eradicated these treats.

However, there is also a widely held belief that the separation of commercial and invest-

ment banking activities is not so beneficial to the safety of the financial sector and the wider econ-

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omy. This is an argument that gained such traction that it lead to the repeal of the act under the

Clinton administration. Barth et al (2000) claim that the repeal of Glass-Steagall was induced by a

growing mass of evidence that suggested the securities activities of commercial banks played al-

most no part in the banking collapses of the great depression. Further to this they argue that the

gradual deregulation of banking companies in the late twentieth century, which allowed them to

conduct limited securities trading activities had resulted in no directly attributed banking problems,

a phenomena that was repeatedly the case in other developed countries where the separation of

banking activities was not outlawed. However, Kroszner & Shiller (2011) argue that “these deregu-

latory measures were adopted at the time of an intellectual revolution in financial theory that

seemed to imply that financial markets work perfectly even with little regulation”.

In the late 1980’s there was a collective feeling that more had to be done to cooperate in-

ternationally to strengthen the stability of the banking system worldwide and to remove capital re-

quirement inequalities by creating an international standard (Basel comittee, 2014) . This sentiment

was formalised in 1988 by the signing of the first basel accord, which called for “the minimum re-

quirement of capital to risk-weighted assets of 8% to be implemented at the end of 1992” (Basel

comittee, 2014). In theory this move required banks to retain at least 8% of their deposits, a move

that would protect them from bank runs and allow banks to retain a minimum level of liquidity. How-

ever it was the case that the first Basel accord was not complex enough to impose a minimum liq-

uidity requirement when it came to more complex debt instruments such as Credit Default Swaps

and Mortgage Backed Securities. This weakness was corrected with the publishing of the second

basel accord in 2004. According to the basel committee, “The new framework was designed to im-

prove the way regulatory capital requirements reflect underlying risks and to better address the fi-

nancial innovation that had occurred in recent years. The changes aimed at rewarding and encour-

aging continued improvements in risk measurement and control” (Basel Committee, 2014).

Kroszner & Shiller (2011) question the ability of regulation to determine the appropriate amount of

capital to mitigate risk, and claim that leverage ratios are more of a restraint on banks exposure to

risk than the basel accords. This skepticism of the effectiveness of the basel accords is shared by

Milne (2001) who claims that the main issues with the basel accords are incorrect interpretation of

the impact of capital requirements on bank behaviour, as well as the probability of bank failure.

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Milne’s study claims that the minimum capital requirements actually work as an incentive, “with

banks typically avoiding the possibility of a regulatory intervention by holding a buffer of free capi-

tal” (Milne, 2001).

Post-Crisis Financial Services RegulationFollowing the recent financial crisis, governments around the world acted quickly to reform

financial regulation, seemingly pointing the finger of blame at an industry that was much too lightly

regulated. This involved the passing of legislation and the reform of existing regulatory institutions,

as well as the disbanding of ineffective institutions, and the creation of new bodies to tackle the is-

sues that were deemed most conducive to the crisis. Acharya et al (2010) talk of confidence in free

markets being at an all time low in the wake of the financial crisis, arguing that this makes the pop-

ulation skeptical that the government and regulatory bodes can be effective in ensuring financial

stability.

Despite some exhaustive attempts to construct a more comprehensive regulatory frame-

work, a sizeable proportion of academics consider the actions to be ineffective. Crotty (2009) de-

scribes the ‘New Financial Architecture’ as weak, and argues that the foundations of this new regu-

latory framework implement even looser regulation on commercial banks. He goes further to sug-

gest that the shadow banking system (non-bank financial intermediaries, including hedge funds) is

barely regulated at all. The argument that subsequent regulatory changes have not gone far

enough has been made by many academics including Prasch's (2014) critique of Dodd-Frank, and

Francis & Osborne’s (2012) critique of the 2010 Third Basel Accord.

In 2010 President Obama signed into law the Dodd-Frank Wall Street Reform and Con-

sumer Protection Act, described by Acharya et al as one of the “ most ambitious and far-reaching

overhauls of financial regulation since the 1930’s”. The Economist newspaper noted the excep-

tional length of the bill, comparing its 848 page length to the Glass-Steagall act at 32 pages, and

the Federal Reserve act at 29 pages (The Economist, 2012). Barth et al (2012) believe that as ex-

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tensive as the act may seem, it does not go far enough. They claim that of the 330 rule-making

provisions within the act, 208 of these have no set deadline for when to issue the rules. In their

book ‘Guardians of Finance - Making regulators work for us’, Barth et al provide an extensive cri-

tique of the Dodd-Frank act. The main issue in their opinion is that despite this comprehensive

overhaul of regulation, the same systematic flaws with the regulatory system still exist. They argue

that Dodd-Frank awards more discretionary powers to the regulators, while neglecting to award

power over the regulatory apparatus to the public and their elected representatives.

Levine (2012) makes the point that the act “increases the power of regulatory agencies, re-

duces regulatory gaps, develops better crisis management tools, and consolidates the regulation of

systematically important institutions”. However fundamentally Levine also argues that the act does

not go far enough, clamming that it ‘represents a partial step’ when it comes to establishing a se-

cure financial system due to the same fact that the public is prevented from influencing the regula-

tory bodies to act on their behalf. This is due to a lack of accessible and relatable public informa-

tion. Levine also points out further flaws with the regulatory system such as the negative influence

of short-term political pressures which are exerted on employees of the securities and exchange

commission (the primary regulators of Hedge Funds), as well as the continually critical importance

of credit ratings agencies. It was these agencies which Levine argues “encouraged a broad array

of financial institutions to make poor investment decision that led to the toppling of the financial

system”. However Kroszner and Shiller (2011) dispute this point, clamming that Dodd-Frank act is

actively helping to reduce the reliance on credit ratings agencies.

The basel accords have been the closet arrangement to any sort of international financial

regulation, and in the aftermath of the financial crisis, it was deemed necessary that an update was

made to the accord. Kroszner and Shiller (2011) discuss the primary role of the basel accords,

which was to set a minimum capital requirement for banks and financial institutions in order to miti-

gate the risk of poor liquidity. The most recent instalment of the accord (Basel III) attacks this issue

head on, increasing the minimum total capital buffer from 8% to 10.5% over the course of six years

Barth (2012). Barth praises the efforts of the new Basel III accord, highlighting the introduction of

short-term and long-term coverage ratios. This was done in order to address the likelihood of firms

running into liquidity problems, such as those experienced by many financial institutions during the

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crisis. However he also questions the reliability of new quantitative risk models that are required to

assess the risk of debt instruments, claiming that the models must incorporate ‘questionable as-

sumptions of risk’ due to the fact that they rely on limited historical data.

Historic Hedge Fund RegulationThe first hedge fund was launched in 1949 by Alfred Winslow Jones, based on the poten-

tially abnormal profits obtainable by using an innovative strategy combination of short selling

stocks and adopting the use of leverage to buy stocks (A.W. Jones, 2003). The industry took off in

the late 1960’s, with the publishing of an article in Fortune magazine documenting the substantially

above market returns obtained by the first hedge fund (Bloomberg, 2012). Gorton and Metrick

(2010) propose that the boom in the shadow banking system was also induced by the capping of

federal deposit insurance as $100,000. This limit meant that institutions such as pension funds and

mutual funds could not access short term investments that were secure and interest earning, and

so the only option was to employ the use of a shadow banking institution.

As part of the shadow banking system, it faces an entirely different set of regulation and

regulatory requirements than a commercial bank for example. Writing for the International Mone-

tary Fund, Kodres (2013) claims that the main characteristics that define institutions in the shadow

banking sector are that they are not able to borrow from the Federal Reserve in case of emer-

gency, and they do not have conventional depositors. These institutions raise money mostly

through borrowing from the money markets, with some capital being raised from a select group of

investors. This money is then used to invest in assets with maturities that are long term (Kodres,

2013).

Historically the regulation of the shadow banking system, and thus hedge funds, was very

relaxed. Kroszner & Shiller claim that the shadow banking system had minimal and incoherent reg-

ulation. This statement is backed by Gorton et al (2010) who claim that hedge fund regulation is

virtually non-existent. For many years there was no question about the appropriateness of the reg-

ulation of hedge funds, until that is, the collapse of the Long-Term Capital Management fund

(LTCM) in the late 1990’s. This financial tragedy cause by apparent over exposure to the east

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asian financial crisis made a loss of $4.6 billion (Lowenstein, 2001). Gibson (2000) claims this

mammoth loss “led federal legislators and financial regulators to question weather additional regu-

latory constraints on a hedge funds use of leverage are necessary to protect against financial mar-

ket disruption”.

Academics propose a plethora of arguments as to why it was appropriate for such lax regu-

lation of Hedge funds and the wider shadow banking industry. Writing in the Wall Street Journal,

Peter Wallison (a fellow of the American Enterprise Institute) expresses his concern regarding the

increase of regulation in the shadow banking system, claiming that the system is “principally re-

sponsible for the growth of the U.S. economy over the past 40 years” (Wallison, 2015). One argu-

ment against the regulation of Hedge funds was forwarded by Adrian & Ashcraft (2012) who claim

that there was a perceived confidence in the shadow banking system, due to the widely held belief

in the risk-free nature of the AAA-rated assets that “collateralised shadow banks’ liabilities”( Adrian

& Ashcraft, 2012). This ‘risk-free’ nature of the institutions would act as an antithesis to the belief

that any further regulation of Hedge funds was necessary.

However, Gibson (2000) argues that the main reason for this lack of regulation is not the

status of the institution, but the structure by which it has been set up. He claims that Hedge fund

are “ deliberately structured to be exempt or excluded from various provisions of federal securities

law”, going further to suggest that without such a structure they would have been subject to the se-

curities act of 1933 before the recent financial crisis. One example provided of a way in which

hedge funds are structure to prevent finding themselves within the jurisdiction of the regulators, is

the fact that they do not publicly offer shares in the organisation. Hedge Funds are typical privately

owned, and so were exempt from having to register with the Securities and Exchange Commis-

sion, which is a financial regulator in the United states. Hedge Funds also make use of a loophole

in the Investment company act of 1940, whereby if they maintain an ownership of less than 100 in-

dividuals, then they do not need to conform to this regulation (Gibson, 2000). In highlighting

the many loopholes that hedge funds use when deciding upon their structure, Gibson shows how it

is possible that these institutions can avoid most if not all regulation. The argument is made that in

light of the LTCM collapse, this may not be an appropriate position, as there is no framework in

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place to prevent high leveraged funds from causing systematic loss and altering the course of the

financial markets in the event of their collapse.

Post-Crisis Hedge Fund Regulation Gorton and Metrick (2010) argue that the recent financial crisis had its roots not in the tradi-

tional banking system. Instead they propose that the spark was lit in the shadow banking system,

which they describe as having “non-existant” regulation. Some academics go as far as to say that

hedge funds fundamentally induced the crisis. Lysandrou argues that hedge funds provided the

market and supply pressures for the creation of toxic debt instruments such as CDO’s, which

started the sub-prime mortgage crisis (Lysandrou, 2014). Adrian & Ashcraft (2012) stated that “The

financial crisis of 2007-09 exposed fundamental flaws in the design of the shadow banking sys-

tem”. Many other academic have argued that the regulation of Hedge funds and the more exten-

sive shadow banking system was not enough in the lead up to the financial crisis. The majority of

the literature points to the need for more regulation of hedge funds. However it is the case that too

much regulation may introduce high compliance and implementation costs, as well as restrictions

on money making transactions. These consequences may hamper the profitability of such institu-

tions and thus reduce their positive impact on the economy.

One such effort to curtail the apparent free reign of risk that hedge funds enjoyed in the run

up to the financial crisis, is contained within the mammoth Dodd-Frank act. Kroszner & Sheller

(2011) point out that the remit of the new Financial Services Oversight Council from the Dodd-

Frank act will extend to “identifying emerging systematic risk and improve interagency coordina-

tion”. Also within the act, the Federal Reserve was given the power to supervise all manner of firms

that may pose a threat to financial stabiliy, even those with no ownership stake in banks According

to Gorton et al (2010) there Federal Reserve also maintains the authority to regulate all systemati-

cally important institutions. These new laws has enveloped Hedge Funds into the jurisdiction of the

Federal Reserve system for the first time, giving them the power to enforce “more stringent and

prudential standards” upon firms which are highlighted as a risk to the financial system (Kroszner &

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Scheller, 2011). Kroszner & Scheller claim that this allows the enforcement of capital requirements

transcend the boundaries between the conventional banking system and the shadow banking sys-

tem, in a way that aids the efforts to maintain long term economic stability. One further new regu-

larity requirement made of hedge funds is that they now must register with the Securities and Ex-

change Commission (Gorton et al, 2010). This is a move that exposes Hedge funds to increased

regulatory scrutiny over their security transactions.

These new laws would suggest a comprehensive inclusion of Hedge funds into the regula-

tory framework for the first time in their history, however the issue is much more complex. Peter

Wallison (2015) argues that the seemingly exhaustive Dodd-Frank act actually does not give the

Federal Reserve system or the new Financial Services Oversight Council the authority to regulate

Hedge funds. He bases this case on the argument that Hedge funds by themselves are not neces-

sarily systematic but become systematic due to their participation “in a complex chain of transac-

tions” (Wallison, 2015). Gorton et al (2010) also argue that the Dodd-Frank act fails to meet the

necessary regulatory standards with respect to the regulation of the shadow banking system. The

authors outline three areas in particular where there are seemingly gaps in the new regulation,

namely the regulation of Money-Market Mutual Funds (MMMF’s), securitisation and repurchase

agreements. One argument that was made by Gibson (2000) in relation to the regulation of hedge

funds before the financial crisis, was that the regulatory controls “do not provide regulators with the

authority to make comprehensive disclosures about their risk management practises and their trad-

ing positions and exposures” (Gibson, 2000). The problems highlighted by gibson 15 years ago

largely remain to be addressed by any changed in the regulation of the industry, despite its seem-

ingly important role in the recent financial crisis. One exception to this statement is in the require-

ment of hedge funds to be registered at the SEC, which enforces disclosure of security positions

(Adrian & Ashcraft, 2012).

Summary of the Literature

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It is clear that the regulation of hedge funds remains a fluid and divisive issue. There is a

contrast between the pre-crisis and post-crisis approach to regulation in that there was an almost

unanimous call for increased regulation after the crisis. However, it is not evident that the mea-

sures taken to rectify this ‘lack’ of regulation have been effective, and many believe more has to be

done in order to mitigate the risk posed by under regulated hedge funds and the threat they pose

to the overall financial system. Even then, some may argue that the regulatory efforts (the bulk of

which are contained within the Dodd-Frank act) are too much, and that the regulation of Hedge

funds and the more extensive shadow banking system should be as unobtrusive and narrow as

possible, yet still present. It may be the case that even more regulation should fall on the side of

the traditional financial system, as argued by Crotty (2009), Prasch (2014) and Francis & Osborne

(2012), as well as many other academics.

The subject of the subsequent research proposal concerns the appropriate level of regula-

tion of Hedge Funds, with the objectives of the mitigation of threats to the financial system, while

also maintaining a level of profitability that benefits the wider economy.

Research Methodology

MotivationIt can be argued that too much of the post-financial crisis blame is placed on banks, and

that governments and regulatory bodies are imposing tougher regulations on these institutions,

while neglecting to increase regulation on other culprits such as hedge funds. Some academics go

as far as to say that hedge funds fundamentally induced the crisis. Lysandrou argues that hedge

funds provided the market and supply pressures for the creation of toxic debt instruments such as

CDO’s, which started the sub-prime mortgage crisis (Lysandrou, 2014). It is widely accepted that

Hedge Funds were able to use regulatory loopholes in the run up to the crisis, and were much

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more lightly regulated in the years leading up to 2008. (Dierick &Garbaravicius, 2005). However it

can also be argued that there are significant macroeconomic costs associated with the overregula-

tion of Hedge Funds. High compliance and implementation costs, as well as restrictions on money

making transactions may hamper the profitability of such institutions and thus reduce their positive

impact on the economy. Answering the research question will aid regulatory bodies in their efforts

to determine what level of regulation is appropriate for these institutions, and to strike a balance

between the mitigation of the risk posed by Hedge Funds, and their continued profitability.

Research QuestionIs the current regulatory framework concerning hedge funds appropriate for the safeguard

of the wider financial system, and for the continued profitability of the industry?

Sociological StandpointThe research will be undertaken via a positivist epistemological approach. This conforms to

the idea forwarded by Easterby-Smith et al (2010), who propose that “positivist methods usually

incorporate the assumption that there are true answers, and the job of the researcher is to pose

several hypotheses and seek data that will allow the selection of the correct one”. This would be

the case when conducting the research based on the proposed question, as there is an underlying

assumption that there is a true degree of ‘appropriateness’ to the level of regulation that Hedge

Funds would be subject to. Bryman and Bell’s (2007) describe research from a positivist perspec-

tive as “The application of the methods of the natural sciences to the study of social reality and be-

yond”. Again this conforms to the type of research that will be carried out to answer the proposed

question, as answering the question of appropriateness of regulation is a compromise of two alter-

natives based in social reality.

Burrell and Morgan (1979) created a framework which describes the sociological character-

istics of research by the determination of the position of the research along two axises of Regula-

tion - Radical Change, and Subjective - Objective. Depending on where the research lies on both

of these axises, the research will fall within one of four paradigms which are Functionalist, Interpre-

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tive, Radical Structuralist and Radical Humanist. The classification of the sociological paradigm

that the research conforms to is beneficial when it comes to determining the most appropriate

methods of conducting the research. In this case, the research conforms to characteristics typical

of the functionalist paradigm, due to the fact that the issue in question can be resolved through hy-

pothesis testing.

Specific ApproachThe primary method by which the research will be carried out is through the use of postal

questionnaires. According to Raddon (2015) this is a method of data collection that is very typical

of positivist research. There is a precedent of adopting this data collection method when conduct-

ing research of this type, as typified by Eling, Martin and Pankoke (2014). The primary aim in their

investigation was in determining how much it cost individual firms to comply with regulation, and

they were able to make the case that this excess cost was burdensome on the growth of the econ-

omy as a result of the use of postal questionnaires. Easterby-Smith et al (2010) argue that an ad-

vantage of using postal questionnaires is the relative cost efficiencies per respondent over alterna-

tive methods of data collection. With other advantages including the potential for the collection of a

large set of data in a relatively short period of time. One of the min reasons that this is an appropri-

ate method of research for this particular question, is that the same questionnaire can be distrib-

uted to parties with pro-regulation agendas as well as parties with anti-regulation agendas. This

enables the researcher to observe the explicit differences in their responses, as the test conditions

are the exact same.

In order to conduct the data to answer the question, postal questionnaires will be distributed

to hedge funds, academics in the field of economics and finance as well as the concerned regula-

tory agencies. Their responses will help to determine the costs and benefits to each party of the

implementation of regulation, with the inclusion of academics to substitute for the opinion of the in-

formed public.

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Limitations There are some limitations attributed to the use of postal Questionnaires. The primary limi-

tation highlighted by a number of authors is the potential for there to be a low response rate. East-

erby-Smith et al (2010) argue that there may be a lack of incentive for respondents to complete

and return the questionnaire, despite the fact that there is no financial cost implied for participants

along with the the retention of their anonymity. They go on to suggest that those who conduct re-

search may incentivise respondents, perhaps by offering financial incentives .

There are also inherent limitations to positivist research being carried out in this way, such

as the possibility of collecting inaccurate data. This may occur in the event that respondents an-

swer randomly and do not provide authentic responses.

SampleThe sample will include a range of relevant parties that will represent the widest possible

opinion on the regulation of hedge funds. These are to include Hedge fund manager themselves,

regulatory agencies, government departments, as well as academics in the field of economics and

finance (to represent the view of the educated public).

Measurement ToolIn order to achieve the most explicit result from the study, questions posed will be close-

ended with ordered responses. Questions regarding the costs and benefits of both the increase

and decrease of regulation of hedge funds will be answerable on a five point scale. The answers

will range from strongly agree, agree, neither agree or disagree, disagree and finally to strongly

disagree. This measurement tool has the advantage of being much easier to interpret that open-

ended questions, a key requirement when dealing with a large set of data. Further to this, it is sig-

nificantly less challenging to directly compare responses from different perspectives when the

questions have ordered responses (Reja et al, 2003)

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However, there are certain disadvantages when it comes to using this sort of data mea-

surement tool. One such issue is Pointed out by Reja et al (2003) is the fact that the response is

limited with close-ended questions, with the consequence that “a bias may result from suggesting

responses to individuals”.

Proposed data analysisThe data collected will be analysed by the researcher, with the results from each of the con-

cerned parties (governments, hedge funds, regulators and the general public) being aggregated in

order to determine to opinion of each stakeholder. This will allow for the explicit comparison of data

between the interested parties, as well as potentially enabling the identification of trends in certain

areas.

Reliability and validityWhen discussing issues of reliability and validity, it is first essential to point out that this re-

search will be taken from an quantitative viewpoint. This is expressed in the decision to use close -

ended questions with ordered responses as the primary data collection tool, because it suggests

that the opinions of those concerned will fall into pre-set categories, and thus is objective in its na-

ture. To assess the reliability and validity of the research, four key considerations must be made

when collecting the data for the study in order to make the research ‘robust to scrutiny’. These con-

siderations are Reliability, Sufficiency, Internal Validity and Generalisability .

Reliability

The important question concerning the reliability of data is ‘ will the same study yield the

same results if repeated under the same circumstances’? This question is easily answered in the

case of this investigation, as the use of close-ended questions with ordered answers means en-

sures that under the same circumstances, the same result should be obtained following a repeat of

the study.

Internal Validity

Questions regarding internal validity are concerned with the “instruments or procedures

used in the research measured what they were supposed to measure” (UC Davis, 2015). The

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questions posed in the questionnaire will be designed to measure the extent to which parties agree

with a particular statement. As a general example one question may sound a bit like; “ Do you

agree that the Dodd-Frank Wall Street Reform act was successful in totally curtailing the system-

atic risk posed to the financial system by Hedge Funds?”. As respondents are only selecting the

most relevant degree of agreement with the statement, there is little room for the question to mea-

sure anything other than what it explicitly states.

Generalisability

When considering the generalisability of data, the questions posed refer to the patterns in

the data collected as part of the research representing the population as a whole. In order to ad-

dress questions of this nature, the study will be set up in such a way as to gain the perspectives

from all interested parties in this study, whether they be the hedge funds themselves, regulators,

the government or the general public. There will also be a large sample population in order to miti-

gate the risk of erratic data points contaminating the overall results of the study. This is made pos-

sible due to the cost effectiveness of the data collection method chosen.

Sufficiency

From a quantitative perspective, questions around sufficiency address the possibility that

the findings of the study have been produced through chance. This risk is mitigated in this study

through the use of a very large pool of participants, made possible due to the cost efficiencies of

postal questionnaires.

Conclusion

If conducted, this research will join a very limited number of studies regarding the appropri-

ateness of the regulation of hedge funds. The important nature of hedge funds and the role they

play in the wider financial system has been outlined, and it is the essential nature of their role, that

justifies the importance of research into these institutions. This results of this research will make an

empirical contribution to the determination of the appropriate level of regulation of hedge funds and

18

the wider shadow banking system, and may lead to policy considerations regarding future changes

to the regulation of these institutions.

To this day debates are raging internationally about the effectiveness of financial regula-

tion, and whether or not a future financial crisis can be prevented in the present because of regula-

tory decisions. Although specific to the issue of hedge fund regulation, this study will aid to a grow-

ing body of literature that will aid policy makers in their efforts to determine appropriate levels of

regulation throughout the financial sector.

References

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