Hedge Funds and Financial Intermediaries

77 Pages Posted: 19 Jun 2019

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: June 10, 2019


Hedge funds and financial intermediaries are connected through their prime brokerage relationship. We find that systematic financial intermediary risk, as measured by the covariation between the fund return and the return of a portfolio of key prime brokers, captures cross-sectional differences in hedge fund returns. Once we control for the systematic risk, we find little evidence that idiosyncratic financial intermediary risk matters. We evaluate if large adverse shocks to individual prime brokers propagate to their hedge fund clients and find a significant impact only in the case of the Lehman Brothers' bankruptcy. However, that impact was mitigated for funds with multiple prime brokers, suggesting that even extreme prime broker shocks are diversifiable.

Keywords: hedge funds, networks, prime brokers, systematic risk

JEL Classification: G12, G23, G24

Suggested Citation

Dahlquist, Magnus and Sokolovski, Valeri and Sverdrup, Erik, Hedge Funds and Financial Intermediaries (June 10, 2019). 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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