Funding Risk and Expected Hedge Fund Returns

Preprint
Publisher Website
Google Scholar
Abstract
We empirically examine how funding risk affects average realized hedge fund returns. Funding risk, which captures the extent to which a fund can leverage its positions, is measured using margins on equity, currency, and interest rate futures contracts. Using data from January 1990 to May 2009, we find a statistically significant risk premium for funding risk in hedge fund returns. The magnitude of this premium is much higher during both the LTCM crisis of August 1998 and the sub-prime crisis of October 2008. Estimates of the stochastic discount factor show that the funding risk factor helps explain variation in hedge fund returns after controlling for other risk factors commonly employed in the literature.

This publication has 0 references indexed in Scilit: