Systemic Risk Centre Seminar
Date: Monday, 23rd May 2022
Time: 1.00 - 2.00pm BST
Speaker: Valeri Sokolovski (HEC Montréal)
Seminar title: Hedge Funds and Financial Intermediaries (co-authored with Magnus Dahlquist, Simon Rottke and Erik Sverdrup)
Abstract: Hedge funds and financial intermediaries are connected through their prime brokerage relationship. We find that systematic financial intermediary risk is important for understanding the cross-section of hedge fund returns. We show that systematic shocks propagate from prime brokers to hedge funds and not the reverse. There is little evidence that idiosyncratic financial intermediary risk matters. We evaluate if large adverse shocks to individual prime brokers propagate to their clients, finding a significant impact only in the Lehman bankruptcy case. This impact, however, was mitigated for funds with multiple prime brokers, suggesting that even extreme prime broker shocks are diversifiable.