A German economist named Reint Gropp published a paper arguing that hedge funds played a more significant role in spreading risk during the 2007-2009 financial crisis than commercial or investment banks. Gropp's model found that hedge funds are the most important transmitters of shocks during market turbulence, even more so than other financial institutions. This is because leverage can cause forced selling by hedge funds that depresses asset prices and leads to further defaults across the financial system. If correct, hedge funds may be considered systemically important and subject to more regulation. A new $600 million fund was launched by Goldman Sachs and the World Bank to increase lending to women-owned businesses in developing countries. An estimated $285 billion financing gap exists

1. Private FundRound-up
By STEPHEN BORNSTEIN
APRIL 29, 2014
Writing on the wall for hedge funds?
In a paper entitled How Important Are Hedge Funds in a Crisis?, a German economist by the
name of Reint Gropp challenged the notion that hedge funds played an insignificant role in the
global financial meltdown of 2007-9. Professor Gropp contends that hedge funds were actually
more instrumental than commercial or investment banks in spreading the risks created during
the crisis and should therefore be considered systemically important financial institutions under
Dodd-Frank. His paper was just published by the San Francisco Federal Reserve where Gropp is
currently a visiting scholar.
Gropp’s model measures the spillover effects of financial crises among commercial banks,
investment banks, insurance companies and hedge funds. He claims the stresses due to
linkages among the institutions are significantly underestimated in widely used risk measures
such as value-at-risk. He also points out that spillovers are typically measured as correlations
among the returns of different asset classes, which do not identify the directions risks travel
between assets.
Not surprisingly, Gropp’s analysis found that financial crises amplify the spillover effects among
financial institutions compared with normal times. The surprising finding, however, is that
hedge funds – which have up to now avoided any responsibility for the crisis -- are the most
important transmitters of shocks during periods of market turbulence, even more important
than commercial banks or investment banks. Insurance companies apparently spread the least
distress among financial institutions in both normal times and financial crises (notwithstanding
isolated cases like AIG).
Gropp claims that leverage is behind the financial shocks that hedge funds cause other financial
institutions. If funds are forced to liquidate assets at fire-sale prices, they may not only default
on their counterparties and creditors, but their forced sales will also depress the valuations of
those assets held by other financial institutions leading to further defaults and losses.
Stay tuned: we may soon see hedge funds in Basel.
Preserving control over start-ups seeking venture capital
Since everyone wants to be a start-up nowadays, those hoping to eventually attract venture
capital should prepare in advance for the negotiations with VCs over management of their
companies. Before giving up equity or issuing convertible notes in exchange for cash,
entrepreneurs should focus on how to preserve control over their babies.

2. To counter what will be their diminished ownership, entrepreneurs can, in their formation
documents, grant themselves a class of common stock carrying special voting rights and
governance protections.
“Entrepreneur’s shares” (or “Class E” shares) can look a lot like preferred stock. For example,
the founders could require a majority vote of Class E shares for any of the following
undertakings:
 amending the Certificate of Incorporation or by-laws
 forming or disposing of a subsidiary
 changing the size of the board of directors
 creating an additional class or series of capital stock
 changing the authorized number of shares of any class or series of capital stock
 liquidating or merging the company
Class E stock could also permit its holders to permanently control a majority of the board or
require a unanimous vote of the Class E board appointees for the company to make other
important decisions, such as amending its stock option plan or issuing debt securities.
The one by-law practitioners counsel against is across-the-board “super-voting” privileges for
founders. 10-1 voting rights on all matters, for example, are generally unacceptable to VCs who
typically expect all shares to carry equal voting rights even if they are willing to vest ultimate
control of the company in the founders.
Financing women entrepreneurs in developing countries
Goldman Sachs and the World Bank recently launched a $600 million fund designed to spur
lending to business start-ups founded by women entrepreneurs in developing countries. The
goal is to reach as many as 100,000 women-owned start-ups. Goldman has seeded the fund
with $50 million and the World Bank $100 million, with the balance to come from public and
private co-investors.
After years of supporting business training programs for women entrepreneurs around the
world, Goldman learned that the biggest obstacle women face in growing their small and
medium-sized businesses is lack of access to capital. The World Bank estimates that 70% of
women-owned SMEs in developing countries can’t get business loans. The result is an
estimated $285 billion global shortfall in credit available to women entrepreneurs.
The new fund will extend lines of credit and share risk with local banks in developing countries
enabling them to on-lend to women-owned SMEs. The backstops provided by the fund will be

3. specifically designed to break down the barriers inhibiting local banks from extending credit to
women entrepreneurs in their respective markets.
A recent Goldman research report on the financial impact of increasing female access to capital
in emerging economies concluded that closing their credit gaps could increase their per capita
incomes by an average of 12% and by more than 25% in developing countries such as Brazil and
Vietnam where the gaps are widest.