Hedge Fund Crowds and Mispricing

Zykaj, Blerina Bela; Sias, Richard W.; Turtle, Harry J.

doi:10.2139/ssrn.1906932

Hedge Fund Crowds and Mispricing

44 Pages Posted: 16 Aug 2011 Last revised: 10 Jan 2018

See all articles by Blerina Bela Zykaj

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: 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