We show that dealers' prime brokerage relations with hedge funds help improve their liquidity provision in a one-sided market. During the March 2020 liquidity crisis, hedge funds increased their corporate bond positions when the bond market faced excessive selling pressures. Dealers connected with hedge funds that are natural buyers of corporate bonds charged lower transaction costs on heavily sold bonds. Dealers' leverage and funding constraints do not explain our results, nor do connections with hedge funds that are natural buyers of other asset classes. Our findings reveal that dealers' willingness to provide liquidity in a one-sided market depends on their connections with natural buyers of corporate bonds.

Fixed income funds carry significant duration risk from their use of interest rate derivatives (IRDs). This duration risk is hidden, as funds have typically disclosed portfolio duration weighted by market values instead of notionals, concealing their true risk. We find substantial variation in IRD duration, both across funds and over time. The primary motive behind funds' use of IRDs is not to hedge interest rate risk or manage flow risk; rather, they are driven by risk-taking, closing the gap to the duration risk of their peers, and the desire for lower transaction costs. The performance of funds' IRD positions is not associated with manager skill—funds that outperformed due to high IRD duration in early 2020 performed particularly poorly during interest rate hikes in 2022 and 2023.

We develop a new measure of daily aggregate hedge fund trades in individual U.S. stocks over 30 years, from 1993 to 2022. Leveraging this high-frequency measure, we find that hedge fund pre-announcement trading significantly predicts abnormal returns around corporate events (e.g., earnings announcements) and various types of public news arrivals. Furthermore, we uncover that hedge funds increasingly utilize alternative data, such as satellite images, to generate informed trading signals. We do not find similar results for trades of non-hedge fund institutional investors. In addition, daily aggregate hedge fund trading positively predicts future stock returns in the cross-section without subsequent reversals, especially for stocks with weak informational environments and high arbitrage costs. Finally, we find that hedge fund trading enhances price efficiency as it reduces variance ratios of stock returns and mitigates price response to earnings announcements.