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

Dan Li, Phillip J. Monin and Lubomir Petrasek
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Phillip J. Monin: https://www.federalreserve.gov/econres/phillip-monin.htm
Lubomir Petrasek: https://www.federalreserve.gov/econres/lubomir-petrasek.htm

No 2024-089, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Hedge funds; Dealers; Leverage; Prime brokerage; Financing; Surveys (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2024-11-21
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-89

DOI: 10.17016/FEDS.2024.089

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