Hedge Fund Liquidity Management

61 Pages Posted: 11 Sep 2017 Last revised: 18 Dec 2017

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

A. Tolga Ergun

Securities and Exchange Commission

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Giulio Girardi

Securities and Exchange Commission

Date Written: September 1, 2017

Abstract

We find that asset illiquidity in hedge funds is typically lower than combined liabilities and equity illiquidity, i.e., hedge funds tend to exhibit negative liquidity mismatch. Using hedge fund regulatory filings of Form PF over 2013-2015, we find that negative liquidity mismatches are more pronounced among larger funds, funds with lower leverage, funds in which managers have a greater personal stake, and when market volatility is lower. We also find support for existing theories of liquidity management: Funds holding more illiquid assets are associated with longer committed periods of investor financing, and the absence of long-term commitments from investors and lenders predicts greater cash holdings and unused borrowing capacity, respectively. Finally, quarterly changes in cash holdings and unused borrowing are negatively related to current and future investor flows and fund returns, suggesting that managers increase liquidity buffers in response to investor outflows, negative performance and ahead of financial distress. Our findings of a negative relation between cash buffer changes and outflows contrast sharply with recent mutual funds studies. We find that hedge funds’ right to enact so-called “discretionary” liquidity restrictions plays an important role in explaining this difference.

Keywords: Liquidity Management; Hedge Funds; Illiquidity; Cash Holdings; Fund Flows

JEL Classification: G11; G23; G32

Suggested Citation

Aragon, George O. and Ergun, A. Tolga and Getmansky Sherman, Mila and Girardi, Giulio, Hedge Fund Liquidity Management (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3033930 or http://dx.doi.org/10.2139/ssrn.3033930

George O. Aragon

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

A. Tolga Ergun

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

Mila Getmansky Sherman (Contact Author)

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

Giulio Girardi

Securities and Exchange Commission ( email )

Washington, DC
United States

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