Prime Broker-Level Comovement in Hedge Fund Returns: Information or Contagion?

Review of Financial Studies, Vol. 29, No. 12, December 2016, pp. 3321-3353

67 Pages Posted: 15 Feb 2014 Last revised: 26 Jan 2017

See all articles by Ji-Woong Chung

Ji-Woong Chung

Korea University - Department of Finance

Byoung Uk Kang

The Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: January 1, 2016

Abstract

We document strong comovement in the returns of hedge funds sharing the same prime broker. This comovement is driven neither by funds in the same family nor in the same style, and it is distinct from market-wide and local comovement. The common information hypothesis attributes this phenomenon to the prime broker providing valuable information to its hedge fund clients. The prime broker-level contagion hypothesis attributes the comovement to the prime broker spreading funding liquidity shocks across its hedge fund clients. We find strong evidence supporting the common information hypothesis, but limited evidence in favor of the prime broker-level contagion hypothesis.

Keywords: Hedge Funds, Prime Brokers, Comovement, Information, Contagion

JEL Classification: G11, G14, G23, G24

Suggested Citation

Chung, Ji-Woong and Kang, Byoung Uk, Prime Broker-Level Comovement in Hedge Fund Returns: Information or Contagion? (January 1, 2016). Review of Financial Studies, Vol. 29, No. 12, December 2016, pp. 3321-3353 . Available at SSRN: https://ssrn.com/abstract=2396522 or http://dx.doi.org/10.2139/ssrn.2396522

Ji-Woong Chung

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

Byoung Uk Kang (Contact Author)

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

School of Accounting and Finance
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852-2766-7085 (Phone)

HOME PAGE: http://www.af.polyu.edu.hk/people/detail/36

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