Close Connections: Hedge Funds, Brokers and the Emergence of a Consensus Trade

Points to Consider When Self‐Assessing Your Empirical Accounting Research

“…For example, examining whether social connections within the hedge fund industry affect investment decisions, Simon, Millo, Kellard, and Engel () observed an “unusual” consensus trade over its lifecycle—the Volkswagen‐Porsche trade—where Porsche had been buying VW stock for some time and had accumulated a significant stake. To take advantage of the discrepancy between the stock prices of VW and Porsche that this had caused, hedge fund managers chose a “popular” long‐short trading position, going long in Porsche (purchasing Porsche stock) and short in VW (borrowing VW stock and selling it with the plan to buy it back later and return it to the lender).…”

“…However, Simon et al. 's () field analyses revealed “several unusual characteristics” of the VW‐Porsche trade that made the stock available for trading fall short of the demand by the short‐sellers, resulting in a sharp increase in the market price of VW stock. The researchers used this “unusual” case to analyze how investors miss or ignore relevant information, contributing to theory about how the structure of ties among agents affects the transfer and interpretation of information, the resulting decision‐making process, and wider market behavior.…”

Do Prime Brokers Induce Similarities in Hedge Funds Performance?

“…According to Baden-Fuller et al (2011), prime brokers sometimes inform some of their hedge fund clients about selective trades made by others. According to Simon et al (2013), they also share and distribute information about the conditions surrounding a possible investment action, whether there is more demand than supply for certain assets, the type of institutions that would like to buy or sell and the size of specific orders. Hence, the hedge funds may combine the brokers' flow of information with their initial trading ideas.…”

Back in the bazaar: taking Pierre Bourdieu to a trading room

“…Most studies of concrete financial decisions (MacKenzie 2003) show that these are not automatic and that they do not derive solely from technological devices. There are interactions, discussion, debates, speculations of people who collectively weigh the relevance of arbitrage or prediction (Beunza & Stark 2004;Simon et al 2012). In the end, technology does not replace people.…”