The life of the counterparty: Shock propagation in hedge fund-prime broker credit networks

• 成果类型: Article
• 署名作者: Kruttli, Mathias S.; Monin, Phillip J.; Watugala, Sumudu W.
• 署名单位: Federal Reserve System - USA; Federal Reserve System Board of Governors; Office of Financial Research; United States Department of the Treasury; Indiana University System; IU Kelley School of Business; Indiana University Bloomington
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2022.02.002
• 发表日期: 2022
• 页码: 965-988
• 关键词: HEDGE FUNDS; Prime brokers; Credit networks; Rehypothecation; collateral

摘要

Using novel credit data, we show that hedge fund borrowing is significantly overcollateral-ized, primarily with rehypothecable securities. An idiosyncratic liquidity shock to a major prime broker significantly decreases credit to connected hedge funds. The dominant chan-nel behind this shock transmission is credit supply reduction rather than precautionary demand reduction. Funds posting more rehypothecable collateral are less affected because their collateral alleviates prime broker liquidity constraints. Exposed funds subsequently have lower aggregate credit with worse terms, suggesting imperfect substitutability across hedge fund credit sources. Funds subject to the decrease in balance sheet leverage subse-quently increase portfolio illiquidity, embedded leverage, and derivatives exposure.(c) 2022 Elsevier B.V. All rights reserved.