How Much Should Investors Pay for Leverage?
13 Pages Posted: 4 Apr 2005
Date Written: March 10, 2005
Abstract
In this paper we consider the problem of the appropriate management fee from the point of view of an investor who has a choice between similar products with different amounts of leverage. The results for fee scaling with leverage are different when the investor chooses to lever himself or has the fund group lever the investment, partly due to the transfer of risk of ruin. We also incorporate the dependence of the fee on the higher funding cost incurred by the manager as a function of increasing leverage.
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation
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