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
September 5, 2014
Recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets. 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 are, on average, positively related to subsequent raw and risk-adjusted returns. Even in periods of extreme market stress, we find no evidence that hedge fund demand shocks are inversely related to subsequent returns. Our results have important implications for the ongoing debate regarding hedge fund regulation.
Number of Pages in PDF File: 47
Keywords: hedge funds, crowds, market efficiency
JEL Classification: G01, G12, G14, G23working papers series
Date posted: August 16, 2011 ; Last revised: September 6, 2014
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