The Role of Hedge Funds in fostering Regulatory Innovations-A Systematic Literature Review

Abstract

The purpose of this paper is to evaluate the relationship between regulatory magnitude and hedge fund market stability, transparency, and general performance across jurisdictions. The methodology used is a systematic literature review using keywords like “hedge fund regulation” and “systematic risk” with only papers from 2018-2024 and from specific Meta databases. The literature review discusses how the presence of robust regulatory oversight reduces the likelihood of systemic risks associated with hedge fund activities. This is coupled with how stricter regulatory frameworks lead to improved transparency and how increased reporting requirements for hedge funds can positively impact market stability. Major findings include successful regulatory efficacy with acts like the Dodd-Frank Act, mixed market impacts, and significant innovation trade-offs. This paper involves a comparison between legislation affecting hedge funds in America and hedge funds in India alongside the impact it has on their performance and results. This paper also involves case studies of hedge funds contributing to legislation directly and indirectly through mechanisms of influence like lobbying and self-regulation. The implications for policymakers are notable, as they must balance transparency mandates with proportionality to avoid stifling smaller funds. Additionally, a major trade-off that regulators must solve is between investor protection and hedge fund growth and performance, as previous regulation has shown consistent increases in compliance costs. To end with, the paper also includes policy recommendations like increased reporting requirements and global coordination in order to combat the existing problems in the hedge fund industry with evaluation and consideration of phenomena like regulatory capture.