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Credit Supply and Hedge Fund Performance: Evidence from Prime Broker Surveys

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Abstract

Constraints on the supply of credit by prime brokers affect hedge funds' leverage and performance. Using dealer surveys and hedge fund regulatory filings, we identify individual funds' credit supply from the availability of credit under agreements currently in place between a hedge fund and its prime brokers. We find that hedge funds connected to prime brokers that make more credit available to their hedge fund clients increase their borrowing and generate higher returns and alphas. These effects are more pronounced among hedge funds that rely on a small number of prime brokers, and those that rely on borrowing rather than derivatives for their leverage. Credit supply matters more for hedge fund performance during periods of financial market stress and when trading opportunities are abundant.

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  • Dan Li & Phillip J. Monin & Lubomir Petrasek, 2024. "Credit Supply and Hedge Fund Performance: Evidence from Prime Broker Surveys," Finance and Economics Discussion Series 2024-089, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-89
    DOI: 10.17016/FEDS.2024.089
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    More about this item

    Keywords

    Hedge funds; Dealers; Leverage; Prime brokerage; Financing; Surveys;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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