We estimate an investors' demand model for hedge funds to analyze the potential impact of leverage limits in the industry. Our estimation results highlight the importance of heterogeneous investor preference for the use of leverage, i.e., 20% of investors prefer leverage usage while others do...

Before the 2007-09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn't account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial...