Abstract

http://ssrn.com/abstract=1917118
 
 

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Hedge-Fund Performance and Liquidity Risk


Ronnie Sadka


Boston College - Carroll School of Management

April 27, 2011


Abstract:     
This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge-fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5% annually, on average, over the period 1994-2009, while negative performance is observed during liquidity crises. The returns are independent of share restriction, pointing to a possible imbalance between the liquidity a fund offers its investors and the liquidity of its underlying positions. Liquidity risk seems to account for a substantial part of hedge-fund performance. The results suggest several practical implications for risk management and manager selection.

Number of Pages in PDF File: 18

Keywords: hedge funds, liquidity risk, share restriction, manager selection, risk management

JEL Classification: G12, G14, G23

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Date posted: August 27, 2011  

Suggested Citation

Sadka, Ronnie, Hedge-Fund Performance and Liquidity Risk (April 27, 2011). Available at SSRN: http://ssrn.com/abstract=1917118 or http://dx.doi.org/10.2139/ssrn.1917118

Contact Information

Ronnie Sadka (Contact Author)
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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