The Evolving Beta-Liquidity Relationship of Hedge Funds
39 Pages Posted: 19 Mar 2012 Last revised: 10 Apr 2017
There are 2 versions of this paper
The Evolving Beta-Liquidity Relationship of Hedge Funds
Market Liquidity and Exposure of Hedge Funds
Date Written: April 10, 2017
Abstract
Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds’ stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach, we find that equity-oriented hedge funds display a significant shift in liquidity-timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies, finding in them no evidence of a similar shift in liquidity timing.
Keywords: hedge funds, market timing, liquidity timing, changepoint regression, dynamic strategies
JEL Classification: G14, G18, G23
Suggested Citation: Suggested Citation