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High Funding Risk and Low Hedge Fund Returns

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  • Sven Klingler

Abstract

I show that hedge funds with a high exposure to market-wide funding shocks—measured by changes in Libor-OIS spreads—subsequently underperform funds with a low exposure to market-wide funding shocks by 5.76% annually on a risk-adjusted basis (t = 4.04). To explain this puzzling result, I hypothesize that this type of funding risk exposure is connected to hedge funds’ liabilities with limited upside in normal times and severe downside risk during funding crises. Supporting this hypothesis, the performance difference between low-funding-risk and high-funding-risk funds is largest when funding constraints are most binding and for funds with more fragile liabilities.

Suggested Citation

  • Sven Klingler, 2022. "High Funding Risk and Low Hedge Fund Returns," Critical Finance Review, now publishers, vol. 11(3-4), pages 505-539, August.
    • Handle: RePEc:now:jnlcfr:104.00000119
    DOI: 10.1561/104.00000119
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    More about this item

    Keywords

    Funding risk; Hedge funds; Interbank risk; Libor; Liquidity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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