Concerning the latter, it is not fully clear what could be the impact of hedge funds’ behaviour on the liquidity of financial markets in a stress situation. Against this background, the report issued in May 2007 by the Financial Stability Forum on High-leveraged institutions is welcome.
The report concluded that, while the so-called indirect regulation of hedge funds through their regulated counterparties, foremost banks, remains the most adequate approach for containing potential risks to financial stability, the effectiveness of this approach cannot be taken for granted and needs to be monitored regularly.