Liquidity Shocks, Size and the Relative Performance of Hedge Fund Strategies

34 Pages Posted: 25 Mar 2008 Last revised: 5 Aug 2008

See all articles by Bill Ding

Bill Ding

Zhejiang University

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Jianbo Tian

SUNY at Albany - Department of Economics

Date Written: May 2008

Abstract

We examine whether the increase in the flow of capital to hedge funds over the period 1994-2005 had a negative impact on performance. More specifically, we study the relative performance of small versus large funds for each of the hedge fund strategies. Our results indicate that on an absolute return basis, small funds outperform large funds. On a risk-adjusted return basis, however, we find that large funds outperform small funds, and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds. Further, funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks. We also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks.

Keywords: Hedge funds, Liquidity, Size, Strategy, Performance

JEL Classification: G29

Suggested Citation

Ding, Bill and Shawky, Hany A. and Tian, Jianbo, Liquidity Shocks, Size and the Relative Performance of Hedge Fund Strategies (May 2008). Available at SSRN: https://ssrn.com/abstract=1090973 or http://dx.doi.org/10.2139/ssrn.1090973

Bill Ding

Zhejiang University

1 Xuefu Road
Ningbo, Zhejiang 315100
China

Hany A. Shawky (Contact Author)

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

Jianbo Tian

SUNY at Albany - Department of Economics ( email )

BA125A, 1400 Washington Ave,
Albany, NY 12222
United States

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