Hedge Fund Stock Trading in the Financial Crisis of 2007-2009

83 Pages Posted: 9 Feb 2010 Last revised: 14 Sep 2011

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Date Written: September 14, 2011

Abstract

Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold about 29% of their aggregate portfolio. Redemptions and margin calls were the primary drivers of selloffs. Consistent with forced deleveraging, the selloffs took place in volatile and liquid stocks. In comparison, redemptions and stock sales for mutual funds were not as severe. We show that hedge fund investors withdraw capital three times as intensely as mutual fund investors do in response to poor returns. We relate this stronger sensitivity to losses to share liquidity restrictions and institutional ownership in hedge funds.

Keywords: Hedge funds, Liquidity, Aggregate Liquidity, Arbitrage, Funding Liquidity, Illiquidity, Liquidity Crisis, Crisis Stock Market Crash, Limits to Arbitrage, Liquidity Spirals, Short Selling, Short Sellers, 13-F, TASS, Uncertainty, Equity Market, Investment Strategy, Mutual Funds, Retail Investors

JEL Classification: G01, G12, G14, G23

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Hedge Fund Stock Trading in the Financial Crisis of 2007-2009 (September 14, 2011). AFA 2011 Denver Meetings Paper, Charles A. Dice Center Working Paper No. 2010-2, Fisher College of Business Working Paper No. 2010-03-002, Swiss Finance Institute Research Paper No. 11-08, Available at SSRN: https://ssrn.com/abstract=1550240 or http://dx.doi.org/10.2139/ssrn.1550240

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
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United States
773 988 1353 (Phone)

HOME PAGE: http://https://u.osu.edu/ben-david.1/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

HOME PAGE: http://www.rabihmoussawi.com/

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