Leveraged Investor Disclosures and Concentrations of Risk

41 Pages Posted: 8 Mar 2007

Date Written: October 27, 2003

Abstract

We analyze a model where investors (e.g. hedge funds) need to borrow from lenders with heterogeneous risk-exposures. Investors may obtain advantageous terms of borrowing by disclosing their investment strategy, thereby revealing its correlation to the lender's existing risk-exposure. Investors risk being "front-run" by their lender if they disclose, however. We show that in the presence of front-running, the "unraveling" result of full disclosure may not hold. Mandating disclosure has ambiguous welfare effects since it can not only lead to the matching of uncorrelated risks, but also to concentrations of risk. These results have implications for regulations on leveraged investors in financial markets.

Keywords: hedge funds, leverage, counterparty, front-running, disclosure, financial intermediaries, credit risk, risk concentrations

JEL Classification: G2, N2

Suggested Citation

Ko, Kwangmin, Leveraged Investor Disclosures and Concentrations of Risk (October 27, 2003). Available at SSRN: https://ssrn.com/abstract=462422 or http://dx.doi.org/10.2139/ssrn.462422

Kwangmin Ko (Contact Author)

Upstart ( email )

2950 S Delaware St #300
San Mateo, CA 94403
United States
2022570741 (Phone)

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