Synthetic Leverage and Fund Risk-Taking
Authors: Daniel Fricke (Deutsche Bundesbank)
Title: Synthetic Leverage and Fund Risk-Taking
Abstract: Mutual fund risk-taking via active portfolio rebalancing varies both in the cross-section and over time. In this paper, I show that funds' off-balance sheet risk-taking displays a similar pattern, even after controlling for on-balance sheet activities. For this purpose, I propose a new measure of synthetic leverage, which can be estimated based on publicly available information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage from mid-2015 up until early 2019. In the cross-section, I find that synthetically leveraged funds tend to underperform and display higher levels of fragility.