Do Hedge Funds Supply or Demand Immediacy?

Abstract:     
Regressing hedge funds’ returns on a measure of the returns from providing immediacy, we find that hedge funds typically supply immediacy in the stock market. In the cross-section, the funds with lengthy lockups and large funds have a higher propensity to supply immediacy compared to other funds. Although the hedge funds typically supply immediacy, we find that the most extreme cross-sectional return reversals are associated with stocks where hedge funds (at that point in time) demand immediacy. Given that hedge funds typically supply immediacy, we study how the capital flows into the hedge-fund industry affect the stock market. We show that increases in the amount of speculative capital improve market liquidity, reduce the amount of short-term return reversal and volatility. Finally, increases in the amount of speculative capital reduce the liquidity premium in stock returns.

Number of Pages in PDF File: 47

Keywords: Hedge Funds, Speculative Capital, Liquidity, Immediacy, Volatility

JEL Classification: G12, G23

working papers series