High Funding Risk, Low Return

62 Pages Posted: 11 Nov 2016 Last revised: 11 May 2021

Date Written: August 30, 2019

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.

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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