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date: 05 March 2021

Abstract and Keywords

This article provides an overview of asset-based lending by hedge funds and considers how such lending differs from both traditional unsecured lending and traditional asset-based lending. Hedge fund asset-based lending helps to complete credit markets by providing loans against assets (or portions of assets) that other lenders typically do not, by sharing risks with other lenders, and more generally by providing loans to companies otherwise viewed as not being creditworthy. The growth of asset-based lending by hedge funds was an inevitable result of the unique incentives and opportunities that apply to hedge funds because of their compensation structure, their focused organizational form, and their relative lack of regulation. The volume of asset-based lending by hedge funds did not become significant, however, until the beginning of the twenty-first century. The characteristics of hedge funds make them in important ways more effective lenders than traditional asset-based lenders, especially with respect to their ability to bear risks and use financing techniques that traditional asset-based lenders are less likely to utilize.

Keywords: hedge fund, asset-based lending, credit market, risks, financial techniques, traditional assets

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