Do Prime Brokers Intermediate Capital?

Abstract

In this paper, I show that prime brokers play an important role in intermediating capital to hedge funds. Specifically, I document that a fund's performance, relative to peers that share the same prime broker, is a first-order determinant of fund flows. I decompose the standard performance-flow relationship into two components: (1) flows that respond to overall rank, and (2) flows that respond to relative (within prime broker) rank. Strong relative rank drives fund in-flows, while poor overall rank drives out-flows. These results suggest that prime brokers intermediate about 40% of the standard performance-flow relationship.

Keywords: Prime Brokers, Hedge Funds, Fund Flows, Intermediation, Arbitrage Capital

JEL Classification: G11, G14, G23, G24