As important as the participation of hedge funds, the derivative products themselves allow credit risk to be hedged, which has the beneficial effect of further increasing the pool of other investors as well. The increase in financial product and provider innovation appears to be quite persistent; future trends, however, are likely to be significantly influenced by legal, regulatory, and other public policies.
The second factor, perhaps equally persistent, supporting strong investor confidence in U.S. markets has been our economy’s strong macroeconomic performance. Researchers have documented the socalled “Great Moderation” in which the U.S. economy has achieved a marked reduction in the volatility of both real gross domestic product (GDP) and core inflation over the past twenty years or so.