With their high share of trading turnover, hedge funds play a critical role in providing liquidity for mis-priced assets, particularly when large volumes are traded in thin markets – thereby reducing volatility. This activity is particularly important, given the rapid growth in volume of new-generation structured products issued by investment banks. Hedge fund leverage estimated via an induction technique suggests a leverage ratio that must be above 3 (versus total AUM of USD trillion). Gearing is required to boost returns where low risk and low return styles are implemented. Investment banks are well capitalised against hedge.
