The aggregate trading volumes of hedge funds reportedly account for significant shares of total trading volumes in some segments of the financial markets. 5 Possible implications of hedge fund growth for financial stability and systemic risk In important respects, the activities of hedge funds tend to foster financial stability. They are significant providers of liquidity across the financial markets.
Many hedge funds are devoted to exploiting arbitrage opportunities that emerge when financial asset prices become misaligned. For example, when interest rates spiked in the summer of 2003, demands by hedgers of mortgage prepayment risks strained the liquidity of interest rate options markets, sending option prices soaring.