Networks for Alpha: Prime Broker Connections and Hedge Fund Manager Selection

45 Pages Posted: 22 Nov 2019

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

Ji-Woong Chung

Korea University - Department of Finance

Byoung Uk Kang

The Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: November 11, 2019

Abstract

Using the setting of funds of hedge funds (FoFs), we show that prime brokers (PBs) help investors search for informed hedge fund managers. We find that FoFs overweight their investments in hedge funds serviced by their connected PBs. This PB bias is larger when the cost of hedge fund due diligence is higher relative to capital and when the FoF's management firm operates a larger hedge fund business with greater potential to generate prime brokerage revenues. We also show that FoFs select PB-connected hedge funds at an information advantage and that FoFs with a larger PB bias exhibit superior performance.

Keywords: Hedge funds, prime brokers, information, due diligence, funds of funds

JEL Classification: G11, G14, G23

Suggested Citation

Aragon, George O. and Chung, Ji-Woong and Kang, Byoung Uk, Networks for Alpha: Prime Broker Connections and Hedge Fund Manager Selection (November 11, 2019). Available at SSRN: https://ssrn.com/abstract=3485354 or http://dx.doi.org/10.2139/ssrn.3485354

George O. Aragon (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Ji-Woong Chung

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

Byoung Uk Kang

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

School of Accounting and Finance
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852-2766-7085 (Phone)

HOME PAGE: http://www.af.polyu.edu.hk/people/detail/36

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