Liquidity Provision in a One-Sided Market: The Role of Dealer-Hedge Fund Relations

We study the role of hedge funds in shaping corporate bond market liquidity. During the March 2020 turmoil, dealers connected to corporate-bond-trading hedge funds charged lower transaction costs on bonds subject to mutual-fund fire sales and committed less capital to market making. Hedge funds entered the crisis with relatively small corporate bond positions compared to equities and Treasuries. Despite selling equities and Treasuries, hedge funds purchased $21 billion of corporate bonds, partly to trade the CDS-bond basis. Dealers' connections with hedge funds reduced frictions in the search for corporate bond buyers and supported dealer liquidity provision in this one-sided market.

Keywords: hedge funds, corporate bonds, market liquidity, mutual funds, fire sales, insurance firms, broker-dealers

JEL Classification: G12, G23, G24.

Suggested Citation: Suggested Citation

Kruttli, Mathias S. and Macchiavelli, Marco and Monin, Phillip and Zhou, Xing (Alex), Liquidity Provision in a One-Sided Market: The Role of Dealer-Hedge Fund Relations (February 25, 2026). SMU Cox School of Business Research Paper No. 23-24, Available at SSRN: https://ssrn.com/abstract=4662272 or http://dx.doi.org/10.2139/ssrn.4662272