The Evolving Beta-Liquidity Relationship of Hedge Funds

Arjen Siegmann

VU University Amsterdam

Denitsa Stefanova

Luxembourg School of Finance

November 11, 2015

Hedge funds are known to have liquidity timing capability, but this might be changing with aggregate market conditions. To test this, we analyze changes in the relation between hedge funds’ stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach we find that equity-oriented hedge funds display a significant shift in liquidity timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies and find no evidence of a similar shift in liquidity timing in them.

Number of Pages in PDF File: 40

Keywords: hedge funds, market timing, liquidity timing, changepoint regression, dynamic strategies

JEL Classification: G14, G18, G23

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Date posted: March 19, 2012 ; Last revised: September 26, 2016

Suggested Citation

Siegmann, Arjen and Stefanova, Denitsa, The Evolving Beta-Liquidity Relationship of Hedge Funds (November 11, 2015). Available at SSRN: https://ssrn.com/abstract=2023924 or http://dx.doi.org/10.2139/ssrn.2023924

Contact Information

Arjen Siegmann
VU University Amsterdam ( email )
De Boelelaan 1105
Dept. of Finance
Amsterdam, NOT IN US OR CANADA 1081 HV
+31205986581 (Phone)
HOME PAGE: http://personal.vu.nl/a.h.siegmann
Denitsa Stefanova (Contact Author)
Luxembourg School of Finance ( email )
4 Rue Albert Borschette
Luxembourg, L-1246
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