Do hedge fund clients of prime brokers front-run their analysts?

This paper examines whether hedge funds profit from front-running upcoming analysts' recommendations before they become public. Our study begins by studying hedge funds' exposures to two style factors representing returns to a perfect foresight strategy of buying (selling) shares that are about to be upgraded (downgraded). The results show that hedge funds with prime brokerage relationships with analysts' firms tend to show stronger and more positive exposures to these style factors. Additionally, a higher percentage of these funds exhibit significant exposures, indicating that they trade in line with upcoming changes in analysts' recommendations. However, some hedge funds with no relationships with analysts' firms also display significant exposures to these style factors. These results indicate that some hedge funds have the skills to perform the same analysis performed by analysts. Overall, we show that at least a portion of hedge funds' profitable trading activities stems from the selective disclosure of information by prime brokers and the competency of fund managers. • Hedge funds front-run analysts' recommendations initiated by their prime brokers. • Prime brokers' hedge fund clients profit from front-running analysts' recommendations. • The front-running of hedge funds is due to their prime brokers' selective disclosure and fund managers' competency.