Hedge Fund Crowds and Mispricing
Blerina Bela Reca
The University of Toledo - Department of Finance
Richard W. Sias
University of Arizona - Department of Finance
Harry J. Turtle
West Virginia University - College of Business & Economics
October 22, 2013
Recent models and the popular press suggest that hedge funds follow similar strategies resulting in crowded equity trades that destabilize prices. Inconsistent with this assertion, we find that hedge fund equity portfolios are remarkably independent. Moreover, when hedge funds do buy and sell the same stocks, their demand shocks drive prices toward, rather than away from, fundamental values. Even in periods of extreme market stress, we find little evidence that hedge funds exert negative externalities on each other or security prices due to crowded trades.
Number of Pages in PDF File: 72
Keywords: hedge funds, crowds, financial crisis
JEL Classification: G01, G12, G14, G23working papers series
Date posted: August 16, 2011 ; Last revised: October 29, 2013
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