Hedge Fund Leverage

Ang, Andrew; Gorovyy, Sergiy; Inwegen, Gregory B. van

doi:10.3386/w16801

Cited by 32 publications

(41 citation statements)

References 33 publications

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“…We equate β to r by assuming that the manager and the investor use the same discount rate. Following LWY, we adopt the average leverage of 2.13 reported by Ang, Gorovyy, and van Inwegen (2011). The unlevered alphas (α ) implied by levered alphas of 0% and 3% are 0% and 1.4%, respectively.…”

Section: Appendix B: : Calculating Indirect Pay For Performancementioning

confidence: 99%

Indirect Incentives of Hedge Fund Managers

Lim¹,

Sensoy²,

Weisbach

2016

The Journal of Finance

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Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.

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Section: Appendix B: : Calculating Indirect Pay For Performancementioning

confidence: 99%

Indirect Incentives of Hedge Fund Managers

Lim¹,

Sensoy²,

Weisbach

2016

The Journal of Finance

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“…At a first glance, therefore, balance sheet B might seem to imply that higher capital requirements force the bank to reduce its supply of deposits, which would be socially costly if the associated services are both profitable for the bank and beneficial for the economy. 18 In practice, however, deposits are not the sole form of bank liabilities. For example, non-trivial portions of bank finance, especially for large commercial banks, come in the form of long-term debt.…”

Section: Assessmentmentioning

confidence: 99%

Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive

Admati¹,

et al. 2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe examine the pervasive view that "equity is expensive," which leads to claims that high capital requirements are costly for society and would affect credit markets adversely. We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private and social costs, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. And while debt's informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient. Better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal. Except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.

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“…Teo (2010) finds that the liquidity risk exposure of hedge fund portfolios is persistent. Ang, Gorovyy and van Inwegen (2011) show the stability of hedge fund leverage. Substantial transaction costs can also prevent frequent portfolio alterations.…”

Section: Model Specificationmentioning

confidence: 99%

A Time to Scatter Stones, and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking

Kolokolova

Mattes

2018

The Financial Review

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Analyzing a sample of hedge fund daily returns from Bloomberg, we find a seasonal pattern in their risk taking. During earlier months of a year, poorly performing funds reduce risk. The reduction is stronger for funds with higher management fees, shorter redemption periods, and recently deteriorating performance, consistent with a managerial aversion to early fund liquidation. Toward the end of a year, poorly performing funds gamble for resurrection by increasing risk. It is largely achieved by increasing exposure to market factors, and can be linked to stronger indirect managerial incentives during the second half of a year.

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Hedge Fund Leverage

Cited by 32 publications

References 33 publications

Indirect Incentives of Hedge Fund Managers

Indirect Incentives of Hedge Fund Managers

Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive

A Time to Scatter Stones, and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking

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