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   "@id": "https://wulfkaal.github.io/claims/1806252-034",
   "identifier": "kaal:claim:1806252-034",
   "text": "Without the threat of systemic risk and without a clear delineation of the social externalities that hedge funds cause, the purpose of direct hedge fund regulation is unclear.",
   "abstract": "Without the threat of systemic risk and without a clear delineation of social externalities caused by hedge funds, the purpose of direct hedge fund regulation is unclear.",
   "citation": "Kaal, Hedge Fund Regulation Via Basel III (2011). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1806252",
   "datePublished": "2011",
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   "text": "The implicit guarantees contained in a bailout multiply the incentives for systemically important financial institutions to increase leverage, because those guarantees make debt cheaper than equity.",
   "abstract": "The implicit guarantees in a bailout may also multiply the incentives for SIFIs to increase leverage because the guarantees could make debt cheaper than equity.",
   "citation": "Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012). SSRN: https://ssrn.com/abstract=1998455",
   "datePublished": "2012",
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   "text": "Registered investment advisers must report systemic risk relevant information to the SEC, including trading practices, trading and investment positions, the amount of assets under management, valuation policies, and side letters.",
   "abstract": "Investment advisers must provide reports with respect to certain information related to systemic risk (Dodd-Frank § 404(b)(3)), such as trading practices, trading and investment positions, the amount of AUM, valuation policies, side letters",
   "citation": "Wulf A. Kaal, The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry (2014). SSRN: https://ssrn.com/abstract=2389423",
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   "text": "The systemic risk of hedge funds arises principally from the combination of aggressive investment strategies and high leverage with adverse price movements that can dry up credit and depress the market price of collateral.",
   "abstract": "Hedge funds' systemic risk is mainly the result of their pursuit of aggressive investment strategies and a significant level of leverage in combination with adverse fluctuations in market prices that can dry up credit and negatively affect the market price of collateral.",
   "citation": "Wulf A. Kaal, The Systemic Risk of Private Funds after the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2470008",
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   "text": "The FSOC itself conceded that available data was insufficient when it tried to identify the activities of the twenty largest United States fund managers as possible sources of systemic risk.",
   "abstract": "Similarly, in its attempt to identify activities of twenty of the largest U.S. fund managers as possible sources of systemic risk,171 the FSOC acknowledged that the available data was insufficient",
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   "text": "The collapse of Long Term Capital Management in 1998 and its Federal Reserve orchestrated bailout made hedge fund risk to international markets apparent, and concerns over excessive leverage combined with a lack of transparency drove the demand for new regulation.",
   "abstract": "Concerns over excessive leverage by hedge funds and a lack of transparency led to increasing demands for new regulation.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
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   "text": "There are no legal limits on hedge fund leverage; the only constraint comes from market discipline supplied by creditors and counterparties through interest rates, credit availability, credit limits, initial margin, and credit spreads.",
   "abstract": "Any limits on a hedge fund's use of leverage come from the market discipline provided by creditors and counterparties.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
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   "text": "Direct regulation of hedge fund leverage collapses on the details because balance sheet leverage is not an adequate measure of risk and would push funds into off-balance sheet avoidance strategies.",
   "abstract": "Balance sheet leverage is not an adequate measure of risk and would encourage avoidance behavior with off-balance sheet strategies.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
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   "text": "Alternative risk measures such as value at risk have severe measurement problems, so any direct regulation of leverage would be set conservatively and would substantially limit hedge funds' ability to provide market liquidity.",
   "abstract": "Any attempt to directly regulate leverage would likely be conservative, due to measurement problems, and put major limits on hedge funds' ability to provide market liquidity.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
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   "text": "Direct regulation of hedge fund leverage increases moral hazard costs, because lenders and counterparties relax their own vigilance once they rely on government rules to constrain fund risk taking.",
   "abstract": "Direct regulation could also increase moral hazard costs as lenders and counterparties may relax their vigilance in reliance on the government rules.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
   "datePublished": "2016",
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   "text": "Indirect regulation through bank capital adequacy standards can reach systemic risk because those standards alter not only banks' credit standards but also counterparty credit risk and therefore hedge funds' level of leverage.",
   "abstract": "Indirect regulation through capital adequacy standards could also address issues of systemic risk because capital adequacy standards will not only regulate and alter credit standards of banks, but also counterparty credit risk and, thus, hedge funds' level of leverage.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
   "datePublished": "2016",
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   "text": "The combined restrictions on registered investment company short selling, leverage, and organizational structure create a substantial disincentive for such companies to pursue absolute return strategies that are independent of the aggregate value of the market.",
   "abstract": "The restrictions on investment company short selling, leverage, and organizational structure create a substantial disincentive for such companies to engage in so-called absolute return investment strategies, which are strategies that are independent of the aggregate value of the market.",
   "citation": "Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974",
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   "text": "Freedom from significant regulatory oversight is what historically enabled hedge funds to run more exotic, more leveraged strategies aimed at absolute returns.",
   "abstract": "Without significant regulatory oversight, hedge funds were able to employ more exotic investment strategies involving more leverage to generate absolute returns for their investors.",
   "citation": "Kaal, Confluence of Mutual and Private Funds (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715083",
   "datePublished": "2016",
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   "@type": "Claim",
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   "identifier": "kaal:claim:2715083-038",
   "text": "Rising demand for alternative strategies creates incentives for mutual fund managers to find ways to simulate leverage, in an industry that historically used little leverage and presented little risk.",
   "abstract": "while mutual funds have historically used little leverage (or leverage-creating derivatives) and presented little risk, the increasing demand for alternative strategies (Kaal & Anderson 2016) creates incentives for mutual fund managers to seek ways to simulate leverage.",
   "citation": "Kaal, Confluence of Mutual and Private Funds (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715083",
   "datePublished": "2016",
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   "identifier": "kaal:claim:2715083-039",
   "text": "The mutual fund industry of the future could carry more risk than its historical averages suggest, a possibility with systemic implications given the comparative size of the mutual fund market.",
   "abstract": "Given this trend, it seems at least possible that the mutual fund industry of the future could be subjected to more risk than the historical averages suggested in the past.",
   "citation": "Kaal, Confluence of Mutual and Private Funds (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715083",
   "datePublished": "2016",
   "claim_type": "predictive",
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    "if the trend toward simulated leverage in mutual funds continues"
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   "@type": "Claim",
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   "identifier": "kaal:claim:2748096-005",
   "text": "The combination of unprecedented private fund industry growth and the low interest rate environment produced by post-crisis quantitative easing pushed private fund managers into reaching for yield, and the leverage and complex derivative transactions used to boost that yield further increased private funds' systemic risk.",
   "abstract": "The unprecedented growth in the private fund industry combined with the low interest rate environment following the Federal Reserve's quantitative easing after the financial crisis resulted in private fund managers' increasingly \"reaching for yield.\"",
   "citation": "Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096",
   "datePublished": "2016",
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   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/2748096-008",
   "identifier": "kaal:claim:2748096-008",
   "text": "Market events like the LTCM failure can escalate into global financial crises when many highly leveraged hedge funds holding illiquid portfolios are obligors of a small number of major financial institutions, because adverse price movements dry up credit and depress collateral values.",
   "abstract": "A large part of the literature recognizes that market events such as the LTCM failure may lead to global financial crises if many highly leveraged hedge funds with illiquid portfolios are obligors of a small number of major financial institutions",
   "citation": "Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096",
   "datePublished": "2016",
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   "text": "The systemic risk of hedge fund leverage comes from its capacity to amplify liquidity losses and to contribute to asset overvaluation during bull markets, not from leverage as such.",
   "abstract": "Systemic risks associated with hedge funds' use of leverage stems from its ability to amplify liquidity losses and contribute to the overvaluation of assets during bull markets.",
   "citation": "Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096",
   "datePublished": "2016",
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   "text": "Concern about hedge fund leverage is empirically overstated: since the collapse of LTCM in 1998 the industry's exposure to leverage has been relatively modest, especially compared with the mean leverage of investment banks and broker/dealers.",
   "abstract": "evidence exists that the hedge fund industry's exposure to leverage has been relatively modest since the collapse of LTCM in 1998, especially compared with the mean leverage of investment banks and broker/dealers (Ang, Gorovyy, and Van Inwegen 2011).",
   "citation": "Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096",
   "datePublished": "2016",
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   "@id": "https://wulfkaal.github.io/claims/2811729-014",
   "identifier": "kaal:claim:2811729-014",
   "text": "The SEC's interpretation of Section 18 leaves a mutual fund subject to no statutory limitation or cap on its ability to borrow through the use of derivative instruments, provided the fund adheres to its asset segregation obligations.",
   "abstract": "In sum, the SEC's position has meant that a mutual fund is not subject to a statutory limitation or cap on its ability to borrow through the use of derivative instruments, if the fund adheres to its asset segregation obligations.",
   "citation": "Wulf A. Kaal, Unconstrained Mutual Funds and Retail Investor Protection (2016). SSRN: https://ssrn.com/abstract=2811729",
   "datePublished": "2016",
   "claim_type": "failure",
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   "is_failure_mode": true,
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    "mutual funds using derivatives under SEC Section 18 guidance as of 2016"
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   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/2957645-015",
   "identifier": "kaal:claim:2957645-015",
   "text": "Contingent capital is an automatic mechanism for increasing capital while reducing debt, and its long term benefit is lowering leverage.",
   "abstract": "Contingent capital is an automatic mechanism for increasing capital while reducing debt with the long-term benefit of lowering leverage.",
   "citation": "Kaal, Dynamic Regulation via Contingent Capital (2017). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2957645",
   "datePublished": "2017",
   "claim_type": "definitional",
   "confidence": "asserted",
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   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/2998097-003",
   "identifier": "kaal:claim:2998097-003",
   "text": "Because banks and brokers had let LTCM borrow the full value of its collateral, LTCM's 4.8 billion dollars in capital dissipated quickly once banks began making margin calls.",
   "abstract": "Because banks and brokers had allowed LTCM to borrow 100 percent of the value of its collateral prior to the worsening of LTCM's financial condition in 1998, LTCM's $4.8 billion in capital dissipated quickly when the banks began to make margin calls.",
   "citation": "Wulf A. Kaal, Private Investment Fund Regulation - Theory and Empirical Evidence from 1998 to 2016 (2017). SSRN: https://ssrn.com/abstract=2998097",
   "datePublished": "2017",
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   "identifier": "kaal:claim:3396522-020",
   "text": "Leverage offered by cryptocurrency exchanges worsens rather than cures the market's illiquidity, because borrowed money rather than genuine demand is driving the price.",
   "abstract": "Cryptocurrency exchanges such as Bitmax, Kraken, among others, offer 5-10x leverage for cryptocurrency trades. This exacerbates the problem of illiquidity as borrowed money is driving the price.",
   "citation": "Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Stable Cryptocurrencies (2019). SSRN: https://ssrn.com/abstract=3396522",
   "datePublished": "2019",
   "claim_type": "failure",
   "confidence": "argued",
   "is_failure_mode": true,
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  },
  {
   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/3405660-008",
   "identifier": "kaal:claim:3405660-008",
   "text": "The same leverage that produced LTCM's high returns magnified its losses, so leverage is a symmetric amplifier rather than a one directional source of performance.",
   "abstract": "In spite of the fact that leverage was key to LTCM ́s high returns, it also magnified LTCM ́s losses.",
   "citation": "Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660",
   "datePublished": "2019",
   "claim_type": "mechanism",
   "confidence": "evidenced",
   "is_failure_mode": false,
   "scope_conditions": [],
   "source_pdf_sha256": "cf507b1833071765bc13a5605f38c2591582eca85f40869e38b6ff075c04d29d",
   "status": "current"
  },
  {
   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/3405660-009",
   "identifier": "kaal:claim:3405660-009",
   "text": "Before its collapse LTCM held roughly $4.8 billion in capital while controlling $160 billion in stocks and bonds, with derivatives of a notional value of $1 trillion.",
   "abstract": "LTCM had $4.8 billion in capital prior to the crash and controlled $160 billion in stocks and bonds. In addition, derivatives of the fund had a notional value of $1 trillion.",
   "citation": "Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660",
   "datePublished": "2019",
   "claim_type": "empirical",
   "confidence": "evidenced",
   "is_failure_mode": false,
   "scope_conditions": [
    "position as of the period immediately before the 1998 crash"
   ],
   "source_pdf_sha256": "cf507b1833071765bc13a5605f38c2591582eca85f40869e38b6ff075c04d29d",
   "status": "current"
  },
  {
   "@type": "Claim",
   "@id": "https://wulfkaal.github.io/claims/3405660-033",
   "identifier": "kaal:claim:3405660-033",
   "text": "The Basel Framework reduces systemic risk by regulating bank credit standards, which indirectly constrains hedge fund leverage and makes credit markets safer.",
   "abstract": "Systemic risk problems are addressed because the Basel Framework regulates the credit standards of banks but indirectly also hedge funds' level of leverage. Hence, credit markets are saver.",
   "citation": "Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660",
   "datePublished": "2019",
   "claim_type": "mechanism",
   "confidence": "argued",
   "is_failure_mode": false,
   "scope_conditions": [],
   "source_pdf_sha256": "cf507b1833071765bc13a5605f38c2591582eca85f40869e38b6ff075c04d29d",
   "status": "current"
  }
 ],
 "description": "26 claims in the published works of Wulf A. Kaal carry the concept tag 'leverage'. Derived node: a roster, not an adjudicated definition."
}