Do Prime Brokers Intermediate Capital?
46 Pages Posted: 14 Aug 2018 Last revised: 26 May 2020
Date Written: May 23, 2020
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
Suggested Citation: Suggested Citation