SNIR

Social networks and idiosyncratic risk in the hedge funds industry

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 Obiettivo del progetto (Objective)

'The origin of the hedge funds industry goes back to a small group of people that began to invest in it. Over time pioneers turned to people similar to themselves in order to involve them in the industry. This makes this industry created in the image of their founders and constituted of a network of people close and similar to each other. Above all this kind of network formation affects the performance of this industry and its risk. In particular, it is important to analyse the idiosyncratic risk that is defined as the inability of the actors to see important trends issues on account of cognitive myopia. To assess the idiosyncratic risk is necessary to analyze the cognitive myopia of actors that is to analyze whether or not actors think alike. The aim of this project is to assess the idiosyncratic risk in the hedge funds industry by analysing the individual attributes, the social network linking actors and the actors’ perceptions. In particular, this project proposes to establish the extent to which the hedge fund market is open to systemic risk on account of cognitive bias of the actors and to identify which parts of the market are most at risk. To this aim this project will develop quantitative estimates of the networks of the actors that gives real insight into idiosyncratic risk. The project will look at the attributes of the actors and will be based on their network profiles in order to provide insight into what constitutes idiosyncratic risk and the profile of a winning manager. Besides, the project will look at the organizational and network data of about 9.000 hedge funds in order to investigate the organizational and network determinants of their performance. By looking at both the individual and organizational levels of analysis the project will provide insight of the social system’s patterns that characterize the hedge funds industry and their managers and will establish the dimensions of competition and risk at the basis of the hedge funds performance'

Introduzione (Teaser)

Hedge funds handle assets worth billions of euros but remain private in nature and are poorly documented. A European-funded study has analysed the link between social networks, risk taking and performance in a unique environment.

Descrizione progetto (Article)

The research consortium has assessed idiosyncratic risk in the hedge fund industry by studying the individual attributes, social networks and perceptions of the leading actors involved. Researchers have also carried out literature reviews and conducted interviews with leading figures in the industry to increase their understanding of the sector.

Interviews have been conducted with major investment banks and other institutions, involving brokers, hedge fund managers, investment analysts and regulators. Following a detailed literature review researchers now have a better appreciation of the relationship between networks, risk taking and performance.

Benefits include greater access to resources and data but drawbacks can involve information overload that can affect the performance of those at the centre of the networks. Being at the centre of a network may make an actor more powerful and able to take risks. However, powerful actors may be reluctant to take risks because they have more to lose.

Findings by the 'Social networks and idiosyncratic risk in the hedge funds industry' (SNIR) project will provide valuable insights for EU and national regulators who wish to further regulate the activities of hedge funds.