Do Hedge Funds Prefer Safe Stocks? Revisiting Hedge Fund Preferences for Stock Characteristics
50 Pages Posted: 12 Jun 2014
Date Written: June 12, 2014
We reexamine hedge fund preferences for stock characteristics using aggregate quarterly hedge fund holdings and a large set of firm characteristics. We find that the expanded set of firm characteristics is important in explaining variation in quarterly hedge fund holdings. Consistent with prior research, we find little evidence that hedge funds prefer stock characteristics that predict higher returns except among characteristics that capture economic and accounting fundamentals. In contrast, we find that hedge fund holdings reveal a strong preference for safe stocks, i.e. stock characteristics that predict low return volatility, that is strongest during bad times (recessions).
Keywords: hedge funds, stock characteristics, cross-section of returns, safe stocks
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