Hedge Fund Ownership, Funding Liquidity Constraints and Excess Return Co-Movement

39 Pages Posted: 6 Sep 2016

See all articles by Jerry T. Parwada

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)

Yixuan Rui

UNSW Australia Business School, School of Banking and Finance

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance

Date Written: September 6, 2016

Abstract

This paper examines the funding liquidity faced by hedge funds and the resulting implication for stocks’ excess return co-movement. We find that hedge fund ownership tends to induce a higher stocks’ return co-movement with each other, compared to other institutional investors like mutual funds and pension funds. By exploring our sample into different periods, we show that the effect of excess return co-movement is much stronger during tight funding periods, which is consistent with price pressure due to flow-induced correlated trading by hedge funds. We further develop the cross-stock reversal trading strategy proposed by Anton and Polk (2014) and find significant abnormal return if we use the portfolio return of connected stocks held in common by hedge funds as a confirming signal. In particular, this trading strategy exploiting such price pressure due to common hedge fund ownership delivers a monthly alpha of 0.3%, which reaches 1.5% over the periods of funding liquidity constraints.

Keywords: Hedge fund, Co-movement

JEL Classification: G12

Suggested Citation

Parwada, Jerry T. and Rui, Yixuan and Shen, Jianfeng, Hedge Fund Ownership, Funding Liquidity Constraints and Excess Return Co-Movement (September 6, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2835273 or http://dx.doi.org/10.2139/ssrn.2835273

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Yixuan Rui (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Jianfeng Shen

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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