Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending

Abstract

This paper investigates important contemporary issues relating to hedge fund involvement in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise due to the lack of regulation relating to hedge funds permissible dual holding of loans and short positions in the equity of borrowing firms. We find evidence of possible trading on private information in the equity of the hedge fund borrowers prior to the public announcements of both loan origination and loan renegotiation (amendments). In addition, our results show that hedge funds are more likely to lend to highly leveraged, low credit quality firms in comparison to bank lenders. Our results have important implications for the current debate regarding regulation of the hedge fund industry.