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The Dark Side of Alternative Asset Markets: Networks, Performance and Risk Taking

47 Pages Posted: 9 Mar 2011  

Charles Baden‐Fuller

City University, London - Cass Business School; University of Pennsylvania - The Wharton School

Simone Ferriani

University of Bologna - Department of Management

Stefano Mengoli

University of Bologna - Department of Management

Vanina Torlo

affiliation not provided to SSRN

Date Written: March 8, 2011

Abstract

When actors invest in making strong network ties (relationships) with other actors, such ties can potentially influence behavior and subsequent financial performance, but the strength and direction of these effects is debated. Using original fine-grained data that documents the nature and extent of the relationships between Hedge Funds through their Prime Brokers (banks that provide leverage, issue credit lines and serve as bridges between Hedge Funds) we probe the social topology of Hedge Fund to Hedge Fund relationships that shapes this global alternative asset market. Contrasting much recent research that tends to stress the positive effects of network relationships, we find that investing in network relationships in this industry appears to have a "dark side" in terms of both performance and risk taking; where we probe various measures of both performance and risk in line with recent finance literature. We explore the reasons for these effects, and conclude that investing in Hedge Fund to Hedge Fund network ties can lead to inferior performance and increased risks that may not benefit the investor.

Keywords: Hedge Funds, Network Analysis, Risk Taking, Performance

JEL Classification: G24, M00

Suggested Citation

Baden‐Fuller, Charles and Ferriani, Simone and Mengoli, Stefano and Torlo, Vanina, The Dark Side of Alternative Asset Markets: Networks, Performance and Risk Taking (March 8, 2011). Available at SSRN: https://ssrn.com/abstract=1781144 or http://dx.doi.org/10.2139/ssrn.1781144

Charles Baden-Fuller (Contact Author)

City University, London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Simone Ferriani

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

HOME PAGE: http://www2.sa.unibo.it/docenti/simone.ferriani/

Stefano Mengoli

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 24
http://stefanomengoli.weebly.com/
Bologna, Bologna 40132
Italy

Vanina Torlo

affiliation not provided to SSRN ( email )

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