Hedge Funds and Financial Intermediaries

75 Pages Posted: 19 Jun 2019 Last revised: 15 Jan 2020

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

Abstract

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 hedge fund return and the return of a portfolio of key prime brokers, is important for understanding the cross-section of 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 clients, and find a significant impact only in the case of the Lehman bankruptcy. However, that impact was mitigated for funds with multiple prime brokers, suggesting 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 (June 10, 2019). 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
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Valeri Sokolovski (Contact Author)

HEC Montreal - Department of Finance ( email )

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

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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