The Secondary Market for Hedge Funds and the Closed Hedge Fund Premium
60 Pages Posted: 18 Mar 2008 Last revised: 29 Jun 2011
Date Written: August 3, 2010
Rational theories of the closed-end fund premium puzzle highlight fund share and asset illiquidity, managerial ability and compensation, and fees as important determinants of the premium. Several of these attributes are difficult to measure for mutual funds, and easier to measure for hedge funds. This paper employs new data from a secondary market for hedge funds, discovers a closed hedge fund premium which is highly correlated over time with the closed-end mutual fund premium, and shows that the closed hedge fund premium is well-explained by variables suggested by the rational theories. Sentiment-based explanations do not find support in the data.
Keywords: hedge funds, mutual funds, closed-end fund discount, liquidity, alpha
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation