This paper evaluates hedge funds that grantfavorable redemption terms to investors. Within this group of purportedlyliquid funds, high net inflow funds subsequently outperform low net inflowfunds by 4.79% per year after adjusting for risk. The return impact of fundflows is stronger when funds embrace liquidity risk, when market liquidity islow, and when funding liquidity, as measured by the Treasury-Eurodollar spread,aggregate hedge fund flows, and prime broker stock returns, is tight. Inkeeping with an agency explanation, funds with strong incentives to raisecapital, low manager option deltas, and no manager capital co-invested are morelikely to take on excessive liquidity risk. These results resonate with thetheory of funding liquidity by Brunnermeier and Pedersen (2009).
Hedge funds, liquidity risk, funding liquidity, asset-liability mismatch
Finance | Finance and Financial Management
2010 European Finance Association Meetings
City or Country
TEO, Song Wee Melvyn.
The liquidity risk of liquid hedge funds. (2010). 2010 European Finance Association Meetings. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5326
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