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

FDIC Working Paper No. 2010-10

35 Pages Posted: 9 Jan 2012

See all articles by Ronnie Sadka

Ronnie Sadka

Boston College - Carroll School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2010


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 liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and they are also robust to commonly used hedge-fund factors. 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, G23

Suggested Citation

Sadka, Ronnie, Liquidity Risk and the Cross-Section of Hedge-Fund Returns (August 1, 2010). FDIC Working Paper No. 2010-10, Available at SSRN: or

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

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Chestnut Hill, MA 02467
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