KCFR Funded Research 2025

Navigating Geopolitical Risk: Evidence from
U.S. Mutual Funds

(Lina Han, Marco Macchiavelli and Matteo Crosignani) 

Our goal is to study the impact of geopolitical risk in asset management industries and how asset allocators respond to the materialization of geopolitical risk. Geopolitical risk is becoming a primary concern for asset managers, with BlackRock (2024) listing strategic competition and technological decoupling between the U.S. and China as top risks going forward.

Common Investors Across the Capital Structure:
Private Debt Funds as Dual Holders

This project examines the dual role of Business Development Companies (BDCs) as creditors and shareholders in the private direct lending market. Utilizing a comprehensive deal-level database, our analysis shows that dual-holder BDCs are more effective monitors than sole lenders, benefiting from enhanced tools for information access and governance. This effectiveness allows them to charge higher loan spreads, while simultaneously reducing credit risk and lowering the borrowing cost of portfolio firms from other lenders. We rule out alternative explanations attributing higher loan spreads to mere compensation for capital injection or to hold-up by a dominant financier. Our findings highlight a critical mechanism through which BDCs serve a market segment—mid-sized firms with low (or even negative) cash flows and a lack of collateral but high growth potentials—that is typically undesired by traditional bank lenders.

Geopolitical Risk and Stock Returns

(Jinfei Sheng and Zheng Sun)

We construct a novel measure of geopolitical risk based on news articles from The Wall Street Journal during 1984-2024, expanding the scope of existing indices by explicitly incorporating trade wars as a distinct component. Our measure captures both traditional geopolitical risks and new dimensions that are increasingly relevant to global markets. We find that our geopolitical risk index positively predicts market returns, highlighting its informational value for investors. This return predictability sets our measure apart from many existing indices, which often fail to capture the same nuances in geopolitical uncertainty. By leveraging textual analysis, our approach offers a more comprehensive and dynamic assessment of geopolitical risks, shedding light on their distinct impact on financial markets.