Did Bank-Related Hedge Funds Benefit from Bailouts During the Financial Crisis?

60 Pages Posted: 16 Mar 2011 Last revised: 19 May 2019

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)

Eric K. M. Tan

University of Queensland - Business School

Date Written: February 12, 2009

Abstract

We examine whether bank-related hedge funds benefited from bailout programs initiated in seven countries during the 2007–2009 financial crisis. We find increased fund liquidation probabilities followed bailouts of financial firms offering prime brokerage services to hedge funds. While affiliated hedge funds post better fund performance, positive money flows, and greater ability to employ leverage, we find no evidence of an improvement in capital adequacy ratios. Rather, connected hedge funds engage in more risk-taking. This finding provides support for the moral hazard hypothesis whereby the bail out of prime brokerage firms results in higher risk-taking, seemingly by reducing their sensitivity to the consequences of failure. Our evidence most strongly points to connected funds benefitting from having access to a greater supply of leverage.

Keywords: Financial crisis, Hedge funds, Bank bailouts, Liquidation, Capital adequacy, Risk

JEL Classification: G10, G21, G23, G28

Suggested Citation

Faff, Robert W. and Parwada, Jerry T. and Tan, Eric K. M., Did Bank-Related Hedge Funds Benefit from Bailouts During the Financial Crisis? (February 12, 2009). Available at SSRN: https://ssrn.com/abstract=1493004 or http://dx.doi.org/10.2139/ssrn.1493004

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Jerry T. Parwada (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Eric K. M. Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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