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The Operation of Hedge Funds: Econometric Evidence, Dynamic Modeling, and Regulatory Perspectives

In: Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models

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Listed:
  • Willi Semmler
  • Raphaële Chappe

Abstract

The Madoff case has all the makings of a Ponzi scheme. Ponzi schemes follow what Hyman Minsky described as Ponzi finance. Do hedge funds, or at least some of them, follow a similar scheme? The best summary of different financing practices, such as hedge, speculative, and Ponzi financing, is given in Minsky (1986). Hedge finance is a situation where operating cash flow can service all payment obligations associated with the financing. Speculative finance involves situations where operating cash flow supports interest payments but not repayment of principal. Ponzi finance describes a situation where operating cash flow is insufficient to cover either principal or interest payments, which can be financed only via an increase in liabilities, thus by a new inflow of funds.

Suggested Citation

  • Willi Semmler & Raphaële Chappe, 2011. "The Operation of Hedge Funds: Econometric Evidence, Dynamic Modeling, and Regulatory Perspectives," Palgrave Macmillan Books, in: Greg N. Gregoriou & Razvan Pascalau (ed.), Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models, chapter 1, pages 3-34, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29520-9_1
    DOI: 10.1057/9780230295209_1
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    Cited by:

    1. von Furstenberg, George M., 2011. "Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue?," Discussion Paper Series 2: Banking and Financial Studies 2011,01, Deutsche Bundesbank.
    2. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, December.

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