Are Hedge Funds Systemically Important?
Gregory W. Brown
University of North Carolina (UNC) at Chapel Hill - Finance Area
Pennsylvania State University
John R. M. Hand
University of North Carolina Kenan-Flagler Business School
October 7, 2010
Journal of Derivatives, Vol. 20, No. 2, 2012
Using a proprietary and unusually comprehensive database of hedge fund returns, we seek to identify abnormal performance consistent with opportunistic trading (e.g., bear raids) or synchronized actions (e.g., widespread forced liquidations) that could generate systemic risk. We find no evidence that hedge funds systematically benefit from opportunistic trading. In contrast, some funds operating with strategies that commonly utilize leverage (e.g., fixed income arbitrage and event-driven strategies) perform significantly worse than would be expected given ex ante risk-factor loadings. This suggests that forced liquidations probably caused some funds to sell into a falling market at fire sale prices. However, underperformance is not concentrated in specific funds that use leverage or during the height of the systemic risks in September 2008 indicating that selling pressure likely derives from meeting redemptions versus forced selling during the crisis. These results suggest new policies regulating hedge funds should focus on certain fund-level risks instead of strategy or industry risks.
Number of Pages in PDF File: 33
Keywords: Financial Crisis, Hedge Funds, Systemic Risk, Short Selling, Derivatives
JEL Classification: G23working papers series
Date posted: October 9, 2010 ; Last revised: January 17, 2013
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.344 seconds