EDHEC, the French research organisation, has criticised the European Central Bank for asserting that hedge funds place financial markets at ...

EDHEC, the French research organisation, has criticised the European Central Bank for asserting that hedge funds place financial markets at considerable risk by encouraging “disorderly exits from crowded trades”. According to the ECB, rising correlation between the returns of different funds and different strategies is evidence of increasingly similar positions being taken in increasingly illiquid assets. This poses a risk to the financial system in the event of massive redemption of shares said the bank. EDHEC argues that there are many reasons apart from similar positions for increasing correlation in returns. To mitigate potential market disruption, EDHEC suggests mechanisms such as lock-up periods to protect hedge funds against a mismatch between asset liquidity and funding liquidity.