The financing innovation in entrepreneurship and hedge funds

Zhang, Hai (2017) The financing innovation in entrepreneurship and hedge funds. PhD thesis, University of Glasgow.

Abstract

This thesis has developed appropriate dynamic models to shed more light on how pervasive innovation (e.g., equity-for-guarantee swaps) in entrepreneurship/hedge funds could
alleviate the severe financing constraints for entrepreneurs/hedge fund managers who plan
to launch new businesses.

Chapter 2 considers a risk-averse entrepreneur who invests in a project with idiosyncratic
risk and takes debt financing via equity-for-guarantee swaps for diversification benefits.
In contrast to the literature, we assume the entrepreneur is unable to get a loan from a
bank directly because of the low credibility of the entrepreneur and lack of collateral and
therefore, an innovative financial contract, equity-for-guarantee swaps, is signed among a
bank, an insurer, and the entrepreneur. The new swap not only solves the serious problems
of widespread financing constraints, but also significantly improves the welfare level of the
entrepreneur.

Chapter 3 develops a new financial derivative product called fees-for-guarantee swap
to alleviate financing constraints of ESFs managers as well as mitigate the manager’s risk shifting
behaviour. Numerical results indicate that the incentive compensation, managerial
ownership and the possibility of fund liquidation significantly mitigate the manager’s risk shifting
incentive.

In Chapter 4, a dynamic valuation model of the hedge fund seeding business has been
built to study the consumption and portfolio choice problem for a risk-averse manager who
launches a hedge fund via a seeing vehicle. This vehicle, i.e. fees-for-seed swap, specifies
that a strategic partner (seeder) provides a critical amount of capital in exchange for participation
in the funds revenue. If structured properly this seeding vehicle could lead to Pareto
improvement, as it alleviates the ESFs manager’s financial constraint, helps seeder get high
potential return for good performance and ordinary investors are more willing to invest in
funds backed up by seeding investment.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Additional Information: Chapter 2 has been published in European Journal of Operational Research, see Wang, Yang and Zhang (2015). Chapter 4 has been published in Journal of Economic Dynamics and Control, see Ewald and Zhang (2016).
• Keywords: Borrowing Constraints, Equity-for-Guarantee Swap, Capital Structure, Cash-out Option, Hedge Fund seeding, Fees-for-seed swap, Fees-for-guarantee swap, HWM, Risk-shifting incentive, and Real options
• Subjects: H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Ewald, Professor Christian Oliver
• Date of Award: 2017
• Depositing User: Mr Hai Zhang
• Unique ID: glathesis:2017-7912
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 10 Feb 2017 10:37
• Last Modified: 07 Mar 2017 10:43
• URI: https://theses.gla.ac.uk/id/eprint/7912