Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis

39 Pages Posted: 11 Nov 2015 Last revised: 17 Sep 2017

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg University - Center for Economic Research (CentER)

Ran Xing

Aarhus University

Date Written: September 14, 2017

Abstract

In this paper, we show that hedge funds repurchased a large amount of liquid stocks and continued to sell illiquid stocks as the 2008 financial crisis mitigated. It complements existing empirical evidence that institutional investors sold more liquid than illiquid assets during the crisis period. This new empirical evidence confirms the trade-off in theoretical literature between selling liquid assets to minimize contemporary trading costs and selling illiquid assets to keep a "liquidity cushion" (e.g. Scholes 2000; Duffie and Ziegler 2003; Brown, Carlin, and Lobo 2010). Consistently, hedge funds' portfolio composition shows a delayed "flight to liquidity'': the proportion of hedge funds' liquid stock holdings decreased slightly at the peak of the crisis and then increased substantially to a highest level ever since 2007. For comparison, we show that pension funds have a nearly constant portfolio composition of liquid versus illiquid stocks through the entire crisis.

Keywords: Liquidity Management, Hedge funds, Flight to liquidity, Price impact

JEL Classification: G11, G23

Suggested Citation

Driessen, Joost and Xing, Ran, Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis (September 14, 2017). Available at SSRN: https://ssrn.com/abstract=2688567 or http://dx.doi.org/10.2139/ssrn.2688567

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Ran Xing (Contact Author)

Aarhus University ( email )

Fuglesangs Alle 4
Aarus, 8210
Denmark

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