Hedge Funds: Risk Management in an Illiquid World

Nancy Davis

Global banking regulations since the financial crisis have fundamentally changed the ways that risk markets function. This has been a refrain since 2010, when debate over the Dodd–Frank financial reforms heated up in the US and with the implementation of Basel III worldwide. This chapter will examine in detail the impact of these regulations on the global investment landscape from the perspective of an alternative investment manager operating in derivatives markets, specifically, options on various asset classes – both on exchanges and over the counter. Further, it will present some key insights about how the industry can adapt to the post-crisis financial world.

PROP TRADING

To outsiders, it might seem that the effects of new regulations have been overblown. Large, global banks in the US and Europe remain large global banks in the new era. In many cases, they have maintained and expanded their market power and market capitalisation. Banks that underwrite equity and debt offerings, or advise on mergers and acquisitions, have continued to cultivate their influence. It might also seem that banks have experienced only a minor impact from being forced to curtail or eliminate their