This paper focuses on the use of interest rates as a tool for hedging against the default risk of heterogeneous hedge funds (HFs) in a leveraged market. We assume that the banks study the HFs survival statistics in order to compute default risk and hence the correct interest rate. The emergent non-trivial (heavy-tailed) statistics observed on the aggregate level, prevents the accurate estimation of risk in a leveraged market with heterogeneous agents. Moreover, we show that heterogeneity leads to the clustering of default events and constitutes thus a source of systemic risk
