Abstract
We document a channel of information flow from prime brokers to their hedge fund clients. We examine whether hedge funds make informed trades on the stocks of firms to which their prime broker’s affiliated bank initiates a syndicated loan. We find that these connected hedge funds make abnormally large trades prior to a loan announcement, compared to their own trades in other stocks or to the trades in the borrowing firm’s stock by unconnected hedge funds. More importantly, we find that the connected hedge funds’ trades subsequently generate superior performance compared to other trades. The outperformance is highest for trades of connected hedge funds that have high revenue generation potential for their prime brokers, and amounts to 7.2% – 8.7% per annum.
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