Regulators and the law of unintended consequences

Interesting article in the FT fund management supplement on Monday, talking about some research Goldmans have done on the recent performance of US stocks that have a large percentage of their market cap owned by hedge funds.

It seems that hedge fund redemptions and deleveraging is having a strong effect on stock performance. The 50 US stocks most exposed to hedge fund investment have slumped by 19% in September, whilst in contrast the S&P has gone down by 9% and those stocks who little hedge fund investment have only gone down by 2%.

Again an interesting illustration of the systematic risks that are around in the market, ones that once the situation has got bad they only make things worse. The regulators should take a lot of care in identifying and categorising all of these types of systematic effects before they formulate the brave new world of tougher regulation. If they don't, then watch out for the law of unintended consequences, it will always catch you out if it can...