Did Connected Hedge Funds Benefit From Bank Bailouts During the Financial Crisis?

64 Pages Posted: 16 Mar 2011 Last revised: 29 Jul 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: July 26, 2019

Abstract

We examine whether connected hedge funds (i.e. those that are prime-brokerage clients of bailout banks) benefited from bailout programs initiated in seven countries during the 2007–2009 financial crisis. We find that being connected to a bailout bank is generally beneficial for hedge funds in that it lowers the rate of fund failure. However, this benefit becomes smaller during the post bailout period, for example, due to the greater risk-taking and higher leverage of such funds subsequent to bailouts. As such, our findings provide support for the moral hazard hypothesis.

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 Connected Hedge Funds Benefit From Bank Bailouts During the Financial Crisis? (July 26, 2019). 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

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 (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
362
Abstract Views
2,233
rank
81,738
PlumX Metrics