High Funding Risk, Low Return

60 Pages Posted: 11 Nov 2016 Last revised: 24 Dec 2019

Date Written: August 30, 2019

Abstract

Guided by a simple model in which hedge fund managers with access to less-profitable investment strategies take more funding risk, I show that 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 $5.99\%$ annually on a risk-adjusted basis (t=3.53). In line with my theory, the performance difference between low-funding-risk and high-funding-risk funds is largest and most significant when funding constraints are most binding and for funds with higher unwinding costs.

Keywords: Funding Risk, Hedge Funds, Interbank Risk, Libor, Liquidity

JEL Classification: G01, G23, G31

Suggested Citation

Klingler, Sven, High Funding Risk, Low Return (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=2868062 or http://dx.doi.org/10.2139/ssrn.2868062

Sven Klingler (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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