Strategic Interaction between Hedge Funds and Prime Brokers

Gerasimova, Nataliya; Jondeau, Éric

doi:10.2139/ssrn.3236260

Cited by 2 publications

(1 citation statement)

References 31 publications

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“…To mitigate risk, they call or raise margins on the loans they have made to hedge funds (Schrimpf et al, 2020, p.2). To meet the margin calls, hedge funds can use their free cash, liquidate their short positions and, if this is not enough, unwind their long positions (Gerasimova and Jondeau, 2018). In this case, liquidation is achieved at a higher cost because securities trade at a higher-than-usual discount or haircut.…”

Section: The Leverage Nexus Within Global Financementioning

confidence: 99%

The invisible leverage of the rich. Absentee debtors and their hedge funds

Sgambati

2024

Competition & Change

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The existing literature on finance, debt, and inequality depicts economic elites as a creditor class. According to a popular thesis, over the past four decades, the rich and ultra-rich households have experienced a saving glut (excess income), which they have invested in the debts of the poor and their governments. While it is undeniable that the rich have expanded their income share at the expenses of the poor, to refer to them as ‘creditors’ or ‘lenders’ is a misrepresentation of how they actually expand their wealth and income shares by financial means. For it conceals the fact that a great deal of their investments is leveraged, that is, carried out with borrowed money. This article shows that the debts generated for the sake of affluent households easily surpass those of all other households. However, these debts are not accounted for in statistics on household debt. This is because affluent households, particularly multi-millionaires and billionaires inside the top 1%, do not simply borrow from banks, like normal households do, but they are instead absentee debtors who borrow through corporate structures of which they are dominant shareholders and ultimate beneficiaries. To gain an insight into their invisible leverage, the article looks at how much hedge funds borrow and why their leverage matters.

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Section: The Leverage Nexus Within Global Financementioning

confidence: 99%

The invisible leverage of the rich. Absentee debtors and their hedge funds

Sgambati

2024

Competition & Change

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Bank-Intermediated Arbitrage

et al. 2018

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We argue that post-crisis bank regulation can explain large, persistent deviations from parity on basis trades requiring leverage. Documenting the financing cost and balance sheet impact on a broad array of basis trades for regulated institutions, we show that the implied return on equity on such trades is considerably lower under post-crisis regulation. In addition, although hedge funds would serve as natural alternative arbitrageurs, we document that funds reliant on leverage from a global systemically important bank suffer significant declines in assets and returns relative to unlevered funds. Thus, post-crisis regulation not only affects the targeted banks directly but also spills over to unregulated firms that rely on bank intermediation for their arbitrage strategies.

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Strategic Interaction between Hedge Funds and Prime Brokers

Cited by 2 publications

References 31 publications

The invisible leverage of the rich. Absentee debtors and their hedge funds

The invisible leverage of the rich. Absentee debtors and their hedge funds

Bank-Intermediated Arbitrage

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