Hedge Fund Stock Trading in the Financial Crisis of 2007-2009

83 Pages Posted: 9 Feb 2010 Last revised: 14 Sep 2011

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

Date Written: September 14, 2011

Abstract

Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold about 29% of their aggregate portfolio. Redemptions and margin calls were the primary drivers of selloffs. Consistent with forced deleveraging, the selloffs took place in volatile and liquid stocks. In comparison, redemptions and stock sales for mutual funds were not as severe. We show that hedge fund investors withdraw capital three times as intensely as mutual fund investors do in response to poor returns. We relate this stronger sensitivity to losses to share liquidity restrictions and institutional ownership in hedge funds.

Keywords: Hedge funds, Liquidity, Aggregate Liquidity, Arbitrage, Funding Liquidity, Illiquidity, Liquidity Crisis, Crisis Stock Market Crash, Limits to Arbitrage, Liquidity Spirals, Short Selling, Short Sellers, 13-F, TASS, Uncertainty, Equity Market, Investment Strategy, Mutual Funds, Retail Investors

JEL Classification: G01, G12, G14, G23

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Hedge Fund Stock Trading in the Financial Crisis of 2007-2009 (September 14, 2011). AFA 2011 Denver Meetings Paper; Fisher College of Business Working Paper No. 2010-03-002; Swiss Finance Institute Research Paper No. 11-08. Available at SSRN: https://ssrn.com/abstract=1550240 or http://dx.doi.org/10.2139/ssrn.1550240

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Francesco A. Franzoni

Università della Svizzera italiana (USI), Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 1003
Villanova, PA 19085
United States

University of Pennsylvania - The Wharton School ( email )

United States

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