Liquidity Costs, Return Smoothing, and Investor Flows: Evidence from a Separate Account Platform

Posted: 24 May 2013

See all articles by Charles Cao

Charles Cao

Pennsylvania State University

Grant V Farnsworth

Texas Christian University; Pennsylvania State University - Department of Finance

Bing Liang

University of Massachusetts Amherst - Department of Finance

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Date Written: May 24, 2013

Abstract

Using a new dataset of hedge fund returns from separate accounts on the Lyxor platform, we examine the costs and advantages of the greater liquidity of the Lyxor platform verses those of the associated main hedge funds. Lyxor accounts are traded pari passu with the main fund but provide superior liquidity, third-party reporting, and low funding requirements. Overall, the greater liquidity of the separate account platform reduces the performance of Lyxor accounts by 2.2% annually relative to the associated main hedge fund. The fact that returns are calculated by a third party allows us to estimate the manager discretion (i.e, main-fund specific) portion of hedge fund return smoothing. We estimate that 24% of reported main hedge fund autocorrelation is due to manager discretion in return reporting. We also find strong evidence that investors on the Lyxor platform utilize the ease of liquidation and investment on the platform to chase monthly performance, while no such effect is present in the main funds.

Suggested Citation

Cao, Charles and Farnsworth, Grant V and Liang, Bing and Lo, Andrew W., Liquidity Costs, Return Smoothing, and Investor Flows: Evidence from a Separate Account Platform (May 24, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2269901 or http://dx.doi.org/10.2139/ssrn.2269901

Charles Cao (Contact Author)

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

Grant V Farnsworth

Texas Christian University ( email )

United States
817-257-5593 (Phone)

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

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