How Much Should Investors Pay for Leverage?

13 Pages Posted: 4 Apr 2005

See all articles by Vineer Bhansali

Vineer Bhansali

LongTail Alpha, LLC

Mark B. Wise

California Institute of Technology

Date Written: March 10, 2005

Abstract

In this paper we consider the problem of the appropriate management fee from the point of view of an investor who has a choice between similar products with different amounts of leverage. The results for fee scaling with leverage are different when the investor chooses to lever himself or has the fund group lever the investment, partly due to the transfer of risk of ruin. We also incorporate the dependence of the fee on the higher funding cost incurred by the manager as a function of increasing leverage.

JEL Classification: G10, G12, G13

Suggested Citation

Bhansali, Vineer and Wise, Mark B., How Much Should Investors Pay for Leverage? (March 10, 2005). Available at SSRN: https://ssrn.com/abstract=683345 or http://dx.doi.org/10.2139/ssrn.683345

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Mark B. Wise (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States
626-395-6687 (Phone)
626-568-8473 (Fax)

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