In for the Long Haul: Activist Hedge Funds and Fragility Risk

Abstract

This paper explores the idea that investors ex ante price the risk that large fire sales by liquidity-shocked blockholders will trigger negative price impacts, referred to as "fragility risk," and argues that fragility risk should be lower for institutional blockholders who can credibly signal superior long-term liquidity management. This mitigation of risk can subsequently generate substantial abnormal returns. Especially considered are block acquisitions by activist hedge funds, who are unique in terms of long lock-up and redemption notification periods. A hand-collected dataset reveals comparatively higher cumulative abnormal returns following activist hedge fund block acquisitions. Further analyses reveal that these results extend to a broader group of institutional investors.

Keywords: Institutional Investors, Blockholders, Hedge Funds, Hedge Fund Activism, Liquidity

JEL Classification: G11, G12, G14, G23, G32