Working Paper: NBER ID: w16801
Authors: Andrew Ang; Sergiy Gorovyy; Gregory B. Van Inwegen
Abstract: We investigate the leverage of hedge funds in the time series and cross section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.
Keywords: hedge funds; leverage; financial crisis; systemic risk
JEL Codes: G01; G1; G12; G18; G21; G23; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hedge fund leverage (G23) | listed financial intermediaries leverage (G24) |
| decrease in funding costs (G21) | increase in hedge fund leverage (G23) |
| increase in market values (G19) | increase in hedge fund leverage (G23) |
| decrease in fund return volatilities (G17) | increase in hedge fund leverage (G23) |
| past leverage (G32) | future hedge fund leverage (G19) |