Liquidity risk and the cross-section of hedge-fund returns |
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Authors: | Ronnie Sadka |
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Institution: | Boston College, Carroll School of Management, Chestnut Hill, MA 02467, USA |
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Abstract: | This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important determinant in the cross-section of hedge-fund returns. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually, on average, over the period 1994–2008, while negative performance is observed during liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and they are also robust to commonly used hedge-fund factors, none of which carries a significant premium during the sample period. These findings highlight the importance of understanding systematic liquidity variations in the evaluation of hedge-fund performance. |
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Keywords: | Liquidity risk Hedge funds Price impact Asset pricing |
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