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Close communications: hedge funds, brokers and the emergence of herding

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  • Kellard, Neil
  • Millo, Yuval
  • Simon, Jan
  • Engel, Ofer

Abstract

We examine how communication, evaluation and decision-making practices among competing market actors contribute to the establishment of herding and whether this has impact on market wide phenomena such as prices and risk. Data is collected from interviews and observations with hedge fund industry participants in Europe, the United States and Asia. We examine both contemporaneous and biographical data, finding that decision making relies on an elaborate two-tiered structure of connections among hedge fund managers and between them and brokers. This structure is underpinned by idea sharing and development between competing hedge funds leading to ‘expertise-based’ herding and an increased probability of over-embeddedness. We subsequently present a case study demonstrating the role that communication between competing hedge funds plays in the creation of herding and show that such trades affect prices by introducing an additional risk: the disregarding of information from sources outside the trusted connections.

Suggested Citation

  • Kellard, Neil & Millo, Yuval & Simon, Jan & Engel, Ofer, 2017. "Close communications: hedge funds, brokers and the emergence of herding," LSE Research Online Documents on Economics 64766, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:64766
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    File URL: http://eprints.lse.ac.uk/64766/
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    References listed on IDEAS

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    Cited by:

    1. Lee, Kenneth & Manochin, Melina, 2021. "Sell-side equity analysts and equity sales: a study of interaction," LSE Research Online Documents on Economics 108953, London School of Economics and Political Science, LSE Library.
    2. Lee, Kenneth & Manochin, Melina, 2021. "Sell-side equity analysts and equity sales: A study of interaction," The British Accounting Review, Elsevier, vol. 53(5).
    3. Lin, Junqin & Wang, Fan & Wei, Lijian, 2021. "Alumni social networks and hedge fund performance: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Lu Li & Yang Li & Xueding Wang & Tusheng Xiao, 2020. "Structural holes and hedge fund return comovement: evidence from network‐connected stock hedge funds in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2811-2841, September.
    5. John Buchanan & Dominic H. Chai & Simon Deakin, 2018. "Unexpected Corporate Outcomes from Hedge Find Activism in Japan," Working Papers wp494, Centre for Business Research, University of Cambridge.

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    More about this item

    JEL classification:

    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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