Do Hedge Funds Profit from Mutual-Fund Distress?

49 Pages Posted: 8 Feb 2008  

Joseph Chen

University of California, Davis - Graduate School of Management

Samuel Gregory Hanson

Harvard Business School

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2008

Abstract

This paper explores the question of whether hedge funds engage in front-running strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds -- those suffering large outflows of assets under management -- are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individual stock level, short interest rises in advance of sales by distressed mutual funds.

Suggested Citation

Chen, Joseph and Hanson, Samuel Gregory and Hong, Harrison G. and Stein, Jeremy C., Do Hedge Funds Profit from Mutual-Fund Distress? (February 2008). NBER Working Paper No. w13786. Available at SSRN: https://ssrn.com/abstract=1091421

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Samuel Gregory Hanson

Harvard Business School ( email )

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Morgan 270C
Boston, MA 02163
United States

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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