Funding Liquidity Risk and the Dynamics of Hedge Fund Lockups

Journal of Financial and Quantitative Analysis, Forthcoming

51 Pages Posted: 11 Oct 2016 Last revised: 12 Dec 2019

See all articles by Adam L. Aiken

Adam L. Aiken

Elon University

Christopher P. Clifford

University of Kentucky

Jesse A. Ellis

North Carolina State University

Qiping Huang

University of Dayton

Date Written: October 1, 2019

Abstract

We exploit the expiring nature of hedge fund lockups to create a new measure of funding liquidity risk that varies within funds. We find that hedge funds with lower funding risk generate higher returns and this effect is driven by their increased exposure to equity mispricing anomalies. Our results are robust to a variety of sampling criteria, variable definitions, and control variables. Further, we address endogeneity concerns in a variety of ways, including a placebo approach and regression discontinuity design. Collectively, our results support a causal link between funding risk and the ability of managers to engage in risky arbitrage.

Keywords: Hedge Funds, Funding Liquidity Risk, Lockup

JEL Classification: G10, G23

Suggested Citation

Aiken, Adam L. and Clifford, Christopher P. and Ellis, Jesse A. and Huang, Qiping, Funding Liquidity Risk and the Dynamics of Hedge Fund Lockups (October 1, 2019). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2848392 or http://dx.doi.org/10.2139/ssrn.2848392

Adam L. Aiken

Elon University ( email )

100 Campus Drive
Elon, NC 27244
United States

Christopher P. Clifford (Contact Author)

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
859-257-3850 (Phone)

Jesse A. Ellis

North Carolina State University ( email )

Poole College of Management
Campus Box 7229
Raleigh, NC 27695
United States
919-515-9670 (Phone)

Qiping Huang

University of Dayton ( email )

300 College Park
Datyon, OH OH 45419
United States

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