The debate over whether hedge funds are market stabilizers or disrupters is about to be put to a new test: the fallout from the subprime loan industry, Bloomberg reports.
Should the stock, bond and currency markets be disrupted for a long period of time by subprime loan defaults, the blame is likely to shift to hedge funds.
The reason: hedge funds take frequent advantage of the carry trade, whereby the borrow money from cheap sources and invest it in high-risk, and potentially high-return, areas of the market. However, should the market turmoil arising out of subprime loans pass quickly, the credit is likely to go to hedge funds.
