The Drivers of Hedge Fund Interconnectedness

We study the drivers of interconnectedness among hedge fund strategies. Using the comovement box approach, we find evidence of interconnectedness across all hedge fund strategies and especially compelling evidence for returns falling in the lower end of the distribution. We then identify factors which are likely drivers of interconnectedness: the Multinomial Logit and Multiple Indicators Multiple Causes (MIMIC) model. A higher repo spread and a higher credit spread contribute to a greater interconnectedness in period of low returns; while a higher Treasury-Fed spread, and a prime broker index appears to be associated with interconnectedness in periods of high returns.