Hedge funds caused post-Lehman liquidity crisis, says NY Fed research

Hedge funds drained liquidity during financial crisis

A paper published this week by the New York Fed challenges a popular perception that the misalignment between corporate bond and credit default swap (CDS) spreads during the 2007–09 financial crisis was due to corporate bond dealers shedding inventory when liquidity was scarce, putting the blame instead on hedge funds.

Jaewon Choi of the University of Illinois and Or Shachar of the New York Fed argue in Did Liquidity Providers Become Liquidity Seekers? that in the months following Lehman's colla