Liquidity Risk and the Cross-Section of Hedge-Fund Returns

36 Pages Posted: 22 Mar 2009 Last revised: 12 Nov 2009

See all articles by Ronnie Sadka

Ronnie Sadka

Boston College - Carroll School of Management

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Date Written: September 29, 2009


This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important determinant in the cross-section of hedge-fund returns. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually, on average, over the period 1994-2008, while negative performance is observed during periods of significant liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and are also robust to commonly used hedge-fund factors, none of which carries a significant premium during the sample period. These findings highlight the importance of understanding systematic liquidity variations in the evaluation of hedge-fund performance.

Keywords: Liquidity risk, Hedge funds, Price impact, Asset pricing

JEL Classification: G12, G14

Suggested Citation

Sadka, Ronnie, Liquidity Risk and the Cross-Section of Hedge-Fund Returns (September 29, 2009). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN:

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

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