Prime Broker-Level Comovement in Hedge Fund Returns: Information or Contagion?

Ji-Woong Chung and Byoung Uk Kang

The Review of Financial Studies, 2016, vol. 29, issue 12, 3321-3353

Abstract: We document strong comovement in the returns of hedge funds sharing the same prime broker. This comovement is driven neither by funds in the same family nor in the same style, and it is distinct from market-wide and local comovement. The common information hypothesis attributes this phenomenon to the prime broker providing valuable information to its hedge fund clients. The prime broker-level contagion hypothesis attributes the comovement to the prime broker spreading funding liquidity shocks across its hedge fund clients. We find strong evidence supporting the common information hypothesis, but limited evidence in favor of the prime broker-level contagion hypothesis.Received September 6, 2014; accepted January 7, 2016 by Editor Philip Strahan.

JEL-codes: G11 G14 G23 G24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (16)

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