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Commonality in hedge fund returns: driving factors and implications

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  • Bussière, Matthieu
  • Hoerova, Marie
  • Klaus, Benjamin

Abstract

We measure the commonality in hedge fund returns, identify its main driving factor and analyse 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. JEL Classification: G01, G10, G11, G23

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1658.

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Date of creation: Mar 2014
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Handle: RePEc:ecb:ecbwps:20141658

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Keywords: commonality; financial crisis; hedge funds; liquidity; risk factors;

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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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