Abstract

http://ssrn.com/abstract=1091421
 
 

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Do Hedge Funds Profit from Mutual-Fund Distress?


Joseph Chen


University of California, Davis - Graduate School of Management

Samuel Gregory Hanson


Harvard Business School

Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jeremy C. Stein


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

February 2008

NBER Working Paper No. w13786

Abstract:     
This paper explores the question of whether hedge funds engage in front-running strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds -- those suffering large outflows of assets under management -- are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individual stock level, short interest rises in advance of sales by distressed mutual funds.

Number of Pages in PDF File: 49

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Date posted: February 8, 2008  

Suggested Citation

Chen, Joseph and Hanson, Samuel Gregory and Hong, Harrison G. and Stein, Jeremy C., Do Hedge Funds Profit from Mutual-Fund Distress? (February 2008). NBER Working Paper No. w13786. Available at SSRN: http://ssrn.com/abstract=1091421

Contact Information

Joseph S. Chen
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)
Samuel Gregory Hanson
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
Harrison G. Hong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeremy C. Stein (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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