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Do Hedge Funds Prefer Safe Stocks? Revisiting Hedge Fund Preferences for Stock Characteristics

50 Pages Posted: 12 Jun 2014  

Charles Cao

Pennsylvania State University

Jeremiah Green

Pennsylvania State University

Jiahan Li

University of Notre Dame

Date Written: June 12, 2014

Abstract

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

Suggested Citation

Cao, Charles and Green, Jeremiah and Li, Jiahan, Do Hedge Funds Prefer Safe Stocks? Revisiting Hedge Fund Preferences for Stock Characteristics (June 12, 2014). Available at SSRN: https://ssrn.com/abstract=2449165 or http://dx.doi.org/10.2139/ssrn.2449165

Charles Cao

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

Jeremiah Green (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Jiahan Li

University of Notre Dame ( email )

156 Hurley Hall
Notre Dame, IN 46556-5646
United States

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