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Do Prime Brokers Matter for Funds of Hedge Funds?

Time:2018-02-27 13:33:59  Hits:[]

We analyze possible information sharing between two important types of hedge fund intermediaries, namely funds of hedge funds (FoFs) and prime brokers (PBs). Our premise is that FoFs can economize the costs of due diligence, an important yet expensive source of alpha in hedge fund investment, by tapping into PBs' informational advantage on their hedge fund clients. We show that FoFs on average exhibit a strong bias toward hedge funds that they or their sibling funds share the same PB with. Moreover, the degree of this bias is positively related to subsequent FoF alpha. Our results demonstrate the information provision role of PBs for hedge fund investors and suggest how this can bring about some FoFs' ability to add value.
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