Hedge Fund Liquidity Management: Insights for Fund Performance

Abstract

Using Form PF filings over 2013–2017, we find that hedge funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets, have shorter-term commitments from investors and creditors, and when market volatility is greater. Funds with low abnormal buffers – liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks, especially around earnings announcements. We conclude that managers with better investment opportunities utilize more of their capital and have lower liquidity buffers than their peers

Keywords: Liquidity buffer, hedge funds, fund performance, cash, borrowing

JEL Classification: G11, G23