§ 12.01 Introduction

• Jurisdiction: United States
• Publication year: 2022

§ 12.01 Introduction

Investment funds seek leverage for many reasons. Some funds wish to amplify their returns and employ leverage as a central part of their strategy. Others seek financing to bridge investments, while some funds simply want to have working capital available. Many ways exist for a fund to obtain leverage. The type of leverage available to a fund will depend on the assets and strategies of a fund and the purpose of the debt.

One common thread, however, is that lenders do not view hedge funds as traditional operating businesses, in the sense that a fund itself does not earn a steady stream of cash flow from the sale of assets or the provision of services. The "bankability" of a hedge fund is not measured by its ability to generate "EBITDA" (Earnings Before Interest, Taxes, Depreciation, and Amortization). Instead, lenders pay very close attention to the collateral, together with the other customary factors of reputation, stability, assets under management and historic performance.

This chapter considers some of the more common financing arrangements in the context of...