ABSTRACT
This chapter examines the role of the demand factors behind the process of the production of securities through the shadow banking system. It focuses on the role of hedge funds in the global crisis and, specifically, their function as facilitators of the demand for shadow banking instruments (namely, collateralised debt obligations (CDOs)). While mainstream explanations for the 2007–09 meltdown have tended to focus on the banking system and supply-side factors of financial innovations, it is important not to ignore a central role of the hedge fund industry in driving the demand for new and alternative financial securities. This chapter concurs that the hedge funds might have played no part in the actual construction of shadow banking instruments. It examines hedge fund CDO holdings between 2002 and 2007 and show these holdings to have been an important demand-pull force behind the expansion of the shadow banking system.
