Do Prime Brokers Matter in the Search for Informed Hedge Fund Managers?

50 Pages Posted: 22 Nov 2019 Last revised: 19 Jun 2020

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: June 19, 2020

Abstract

Using the setting of funds of hedge funds (FoFs), we show that prime brokers (PBs) facilitate investors' search for informed hedge fund managers. We find that FoFs exhibit PB bias, a disproportionate preference for hedge funds serviced by their connected PBs. This PB bias is stronger when the cost of hedge fund due diligence is higher relative to capital and when the FoF's management firm generates higher prime brokerage fees. PB bias also predicts FoF performance: the highest PB-bias quartile outperforms the rest by 1.54%-2.77% per annum, after adjusting for differences in their risks.

Keywords: Hedge funds, prime brokers, search frictions, due diligence, funds of funds

JEL Classification: G11, G14, G23, G24

Suggested Citation

Aragon, George O. and Chung, Ji-Woong and Kang, Byoung Uk, Do Prime Brokers Matter in the Search for Informed Hedge Fund Managers? (June 19, 2020). 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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