Liquidity Provision in a One-Sided Market: The Role of Dealer-Hedge Fund Relations
Publication Date
7-31-2026
Abstract
We study the role of hedge funds in shaping corporate bond market liquidity. During the March 2020 turmoil, hedge funds purchased $21 billion of corporate bonds, partly to trade the CDS-bond basis. These hedge funds simultaneously sold equities and U.S. Treasuries, suggesting they faced less binding limits to arbitrage in the corporate bond market. Dealers connected to corporate-bond-trading hedge funds charged lower transaction costs on bonds subject to mutual-fund fire sales and committed less capital to market making. Overall, dealers’ connections with hedge funds reduced frictions in the search for corporate bond buyers and supported dealer liquidity provision.
Document Type
Article
Keywords
hedge funds, corporate bonds, market liquidity, mutual funds, fire sales, insurance firms, broker-dealers
Disciplines
Finance
Source
SMU Cox: Finance (Topic)
Language
English
