Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154091 
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper No. 1658
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
commonality
financial crisis
hedge funds
liquidity
risk factors
JEL: 
G01
G10
G11
G23
Document Type: 
Working Paper

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