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Hedge Fund Stock Trading in the Financial Crisis of 2007-2009Itzhak Ben-DavidOhio State University - Fisher College of Business, Finance Department Francesco A. FranzoniUniversity of Lugano; Swiss Finance Institute Rabih MoussawiUniversity of Pennsylvania - The Wharton School 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 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.
Number of Pages in PDF File: 83 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 working papers seriesDate posted: February 9, 2010 ; Last revised: September 14, 2011Suggested CitationContact Information
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