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Commonality in hedge fund returns: driving factors and implications

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  • Bussiere, M.
  • Hoerova, M.
  • Klaus, B.

Abstract

We measure the commonality in hedge fund returns, identify its main driving factor and analyze its implications for financial stability. We find that hedge funds’ commonality increased significantly from 2003 until 2006. We attribute this rise mainly to the increase in hedge funds’ exposure to emerging market equities, which we identify as a common factor in hedge fund returns over this period. Our results show that funds with a high commonality were affected disproportionately by illiquidity and exhibited negative returns during the subsequent financial crisis, thereby providing little diversification benefits to the financial system and to investors.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 373.

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Length: 48 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:373

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Hedge funds; commonality; financial stability.;

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Cited by:
  1. Dritan Gjika & Roman Horvath, 2012. "Stock Market Comovements in Central Europe: Evidence from Asymmetric DCC Model," William Davidson Institute Working Papers Series wp1035, William Davidson Institute at the University of Michigan.

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