Hedge Fund Crowds and Mispricing

44 Pages Posted: 16 Aug 2011 Last revised: 8 Dec 2014

Blerina Bela Zykaj

Clemson University

Richard W. Sias

University of Arizona - Department of Finance

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: September 5, 2014

Abstract

Recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets. Inconsistent with this assertion, we find that hedge fund equity portfolios are remarkably independent. Moreover, when hedge funds do buy and sell the same stocks, their demand shocks are, on average, positively related to subsequent raw and risk-adjusted returns. Even in periods of extreme market stress, we find no evidence that hedge fund demand shocks are inversely related to subsequent returns. Our results have important implications for the ongoing debate regarding hedge fund regulation.

Keywords: hedge funds, crowds, market efficiency

JEL Classification: G01, G12, G14, G23

Suggested Citation

Zykaj, Blerina Bela and Sias, Richard W. and Turtle, Harry J., Hedge Fund Crowds and Mispricing (September 5, 2014). Available at SSRN: https://ssrn.com/abstract=1906932 or http://dx.doi.org/10.2139/ssrn.1906932

Blerina Bela Zykaj

Clemson University ( email )

Department of Finance
Clemson, SC 29634
United States
864-656-0074 (Phone)

Richard W. Sias (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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