47 Pages Posted: 5 Apr 2012 Last revised: 24 Sep 2015
Date Written: February 1, 2014
We measure the commonality in hedge fund returns, identify its main driving factor and analyze its implications for financial stability. We find that hedge funds’ commonality increased significantly from 2003 until 2006. We attribute this rise mainly to the increase in hedge funds’ exposure to emerging market equities, which we identify as a common factor in hedge fund returns over this period. Our results show that funds with a high commonality were affected disproportionately by illiquidity and exhibited negative returns during the subsequent financial crisis, thereby providing little diversification benefits to the financial system and to investors.
Keywords: Hedge funds, Commonality, Risk factors, Liquidity, Financial crisis
JEL Classification: G01, G10, G11, G23
Suggested Citation: Suggested Citation
Bussière, Matthieu and Hoerova, Marie and Klaus, Benjamin, Commonality in Hedge Fund Returns: Driving Factors and Implications (February 1, 2014). Journal of Banking and Finance, Vol. 54, pp. 266-280, 2015. Available at SSRN: https://ssrn.com/abstract=2034894 or http://dx.doi.org/10.2139/ssrn.2034894