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Commonality in Hedge Fund Returns: Driving Factors and Implications

47 Pages Posted: 5 Apr 2012 Last revised: 24 Sep 2015

Matthieu Bussière

Banque de France

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Benjamin Klaus

European Central Bank (ECB)

Date Written: February 1, 2014

Abstract

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

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

Matthieu Bussiere

Banque de France ( email )

Paris
France

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Benjamin Klaus (Contact Author)

European Central Bank (ECB) ( email )

Frankfurt
Germany

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