Publication Type
Magazine Article
Version
Publisher’s Version
Publication Date
6-2009
Abstract
Many hedge funds impose minimal share restrictions and allow investors to redeem on a monthly basis or better. We find that there is significant variation in the liquidity risk exposure of these “liquid” funds. Within this group of funds, those that embrace liquidity risk outperform those that eschew liquidity risk by 4.86 percent per year. As a consequence of the liquidity risk exposure, funds experiencing outflows subsequently earn lower returns than funds receiving inflows. The effects of flows are more pronounced for funds employing leverage, for funds with high liquidity risk exposure, and during a liquidity crunch. These results underscore the importance of funding liquidity (the ease with which traders can obtain capital) and shed light on the asset-liability mismatch in the hedge fund industry.
Keywords
Hedge funds, liquidity, liquidity risk, hedge fund performance
Discipline
Finance and Financial Management
Research Areas
Finance
Publication
Hedge Fund Insights: Newsletter of the BNP Paribus Hedge Fund Centre at SMU
First Page
2
Last Page
8
Publisher
BNP Paribus Hedge Fund Centre, Singapore Management University
City or Country
Singapore
Citation
Teo, Melvyn. 2009 June. How Liquid are Liquid Hedge Funds? Hedge Fund Insights: Newsletter of the BNP Paribus Hedge Fund Centre at SMU, 2-8.
Copyright Owner and License
BNP Paribus Hedge Fund Centre, Singapore Management University
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.