Hedge Funds and Financial Intermediaries

88 Pages Posted: 19 Jun 2019 Last revised: 27 Oct 2021

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Valeri Sokolovski

HEC Montreal - Department of Finance

Erik Sverdrup

Stanford University

Date Written: May 26, 2021


Hedge funds and financial intermediaries are connected through their prime brokerage relationship. We find that systematic financial intermediary risk is important for understanding the cross-section of hedge fund returns. We show that systematic shocks propagate from prime brokers to hedge funds and not the reverse. There is little evidence that idiosyncratic financial intermediary risk matters. We evaluate if large adverse shocks to individual prime brokers propagate to their clients, finding a significant impact only in the Lehman bankruptcy case. This impact, however, was mitigated for funds with multiple prime brokers, suggesting that even extreme prime broker shocks are diversifiable

Keywords: Hedge funds, prime brokers, systematic risk, idiosyncratic risk

JEL Classification: G12, G23, G24

Suggested Citation

Dahlquist, Magnus and Sokolovski, Valeri and Sverdrup, Erik, Hedge Funds and Financial Intermediaries (May 26, 2021). Swedish House of Finance Research Paper No. 19-8, Available at SSRN: https://ssrn.com/abstract=3396632 or http://dx.doi.org/10.2139/ssrn.3396632

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

Valeri Sokolovski (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7

HOME PAGE: http://www.hec.ca/en/profs/valeri.sokolovski.html

Erik Sverdrup

Stanford University ( email )

Stanford, CA 94305
United States

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