The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry

CHAPTER 11

Hedge Fund Industry’s Role in 2008 Market Crisis

 

 

 

 

The 2008 stock market crash in the United States ranks as the second largest in terms of a percentage drop. From its peak of 13,930 in October 2007 to a low of 6,544 in February 2009, the Dow Jones average dropped 53 percent. This ranks as the second worst drop since the Great Depression of the 1930s, when the index dropped a whopping 89 percent. Figure 11.1 shows the Dow Jones Index prices since 1928, while Figure 11.2 shows the logarithmic values of the index, which helps in comparing the present index to its historical values.

As the stock market has taken a dive of greater than 50 percent, the employment situation has gotten worse in lock step as well. The national unemployment rate has jumped from a low of 4.4 percent in 2006 to 9.4 percent as of May 2009 and is expected to peak between 10 percent and 12 percent by the end of 2009 or early 2010, according to economists’ estimates. Consequently, investors have suffered from a double whammy of a negative income effect, resulting from job losses, as well as a negative wealth effect, resulting from a drop in the value of their stock portfolios as well as the prices of their homes. As the mood of the nation’s investors has turned discernibly surly, demands for inquisition into the causes of the economic downturn have been made with increased frequency and fervor. Mortgage brokers, banks, failed regulators, and even hedge funds have been blamed for causing the current ...