The Liquidity Risk of Liquid Hedge Funds

By Melvyn Teo. 2011

195 citations recorded by the source corpus.

This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79% per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the Treasury-Eurodollar spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping with an agency explanation, funds with strong incentives to raise capital, low manager option deltas, and no manager capital co-invested are more likely to take on excessive liquidity risk. These results resonate with the theory of funding liquidity by Brunnermeier and Pedersen (2009).

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/6dccd9b23d6e505c30a013590926f74194dd97ad

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Citations in the corpus

Tail Risk in Hedge Funds: A Unique View from Portfolio Holdings (2017, methodology): “…shown to influence hedge fund returns including correlation risk (Buraschi, Kosowski, and Trojani, 2014), liquidity risk (Aragon, 2007; Sadka, 2010; Teo, 2011), macroeconomic uncertainty (Bali, Brown, and Caglayan, 2014), volatility risk (Bondarenko, 2004; Agarwal, Bakshi, and Huij, 2009), and…”
Alpha or Beta in the Eye of the Beholder: What Drives Hedge Fund Flows? (2018, unknown): “…Lo, 2007; and Fung et al., 2008) in addition to correlation risk (Buraschi, Kosowski, and Trojani, 2014), liquidity risk (Aragon, 2007; Sadka, 2010; Teo, 2011), macroeconomic uncertainty risk (Bali, Brown, and Caglayan, 2014), and volatility risk (Bondarenko, 2004; Agarwal, Bakshi, and Huij,…”