TY - JOUR T1 - Limited Liability Leverage (<em>L</em> <sup>3</sup>): <em>A New Measure of Leverage</em> JF - The Journal of Alternative Investments SP - 35 LP - 42 DO - 10.3905/jai.2011.13.3.035 VL - 13 IS - 3 AU - Philippe Jorion AU - Mayer Cherem Y1 - 2010/12/31 UR - https://pm-research.com/content/13/3/35.abstract N2 - Average leverage is often used as a measure of risk. However, average leverage in a limited liability context should not be computed as a simple arithmetic average of the underlying constituents. In fact, using a simple arithmetic average can give misleading results. For example, the simple arithmetic average leverage may give results which run counter to the actual risk exposure for certain portfolios. This article introduces a new measure, Limited Liability Leverage (L 3), which corrects the simple average for the limited liability framework. This new measure is discussed in the context of a portfolio of hedge funds and compared to a multi-strategy hedge fund structure, where trading units do not have limited liability. This perspective can also be extended to reflect the lower risk of a financial system with many small institutions relative to a system with large, “too-big-to-fail” institutions.TOPICS: Real assets/alternative investments/private equity, legal/regulatory/public policy, risk management, portfolio construction ER -