Abstract In this paper, the effect of leverage on hedge fund performance is measured. TASS data from 1994 to 2016 are used to measure the impact of leverage on hedge fund performance. Three hedge fund performance measurements are regressed on degree of leverage with eight control variables including fund size, strategies, and use of derivatives. The results show that for strategy-adjusted return as a performance measurement, hedge fund leverage has a negative impact on fund performance. Also there is evidence of diseconomies of scale where funds with medium-sized assets under management (AUM) tend to show better performance than funds with high AUM. No significant relation between use of leverage and performance is observed for other performance measurements, including the Fung and Hsieh seven and eight-factor alpha and style-adjusted return. Acknowledgements I like to express the deepest appreciation to my thesis advisor professor David M. Smith for his continuous support of this research, and for providing me with all the necessary data for the research. His office was always opened for guidance, and his patience allowed this paper to be my own work, but steered in the right direction when needed. I would also like to thank professor Rita Biswas for her insightful comment which leaded me to have wide perspective for my research. I am also grateful for her warm encouragement. I take this opportunity to express gratitude to all of the Finance Department faculty members who are always ready to help students. Without their excellence in teaching, this paper would have never been accomplished.
Abstract In this paper, the effect of leverage on hedge fund performance is measured. TASS data from 1994 to 2016 are used to measure the impact of leverage on hedge fund performance. Three hedge fund performance measurements are regressed on degree of leverage with eight control variables including fund size, strategies, and use of derivatives. The results show that for strategy-adjusted return as a performance measurement, hedge fund leverage has a negative impact on fund performance. Also there is evidence of diseconomies of scale where funds with medium-sized assets under management (AUM) tend to show better performance than funds with high AUM. No significant relation between use of leverage and performance is observed for other performance measurements, including the Fung and Hsieh seven and eight-factor alpha and style-adjusted return. Acknowledgements I like to express the deepest appreciation to my thesis advisor professor David M. Smith for his continuous support of this research, and for providing me with all the necessary data for the research. His office was always opened for guidance, and his patience allowed this paper to be my own work, but steered in the right direction when needed. I would also like to thank professor Rita Biswas for her insightful comment which leaded me to have wide perspective for my research. I am also grateful for her warm encouragement. I take this opportunity to express gratitude to all of the Finance Department faculty members who are always ready to help students. Without their excellence in teaching, this paper would have never been accomplished.
The_Impact_of_Leverage_on_Hedge_Fund_Performance_(Wansoo_Choi).docx