Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds

57 Pages Posted: 20 Dec 2017

See all articles by Mathias S. Kruttli

Mathias S. Kruttli

Board of Governors of the Federal Reserve System; University of Oxford - Oxford-Man Institute of Quantitative Finance

Phillip Monin

Board of Governors of the Federal Reserve System

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 3 versions of this paper

Date Written: December, 2017

Abstract

We show that when only a few investors own a substantial portion of a hedge fund's net asset value, flow volatility increases because investors' exogenous, idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we confirm that high investor concentration hedge funds experience more volatile flows. These hedge funds hold more cash and liquid assets, which help absorb large, unexpected outflows. Such funds have to pay a liquidity premium and generate lower risk-adjusted returns. Investor concentration does not affect flow-performance sensitivity. These results are robust to including lock-up and redemption periods, strategy, manager ownership, and other controls.

JEL Classification: G11, G20, G23

Suggested Citation

Kruttli, Mathias S. and Monin, Phillip and Watugala, Sumudu W., Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds (December, 2017). FEDS Working Paper No. 2017-121, Available at SSRN: https://ssrn.com/abstract=3090951 or http://dx.doi.org/10.17016/FEDS.2017.121

Mathias S. Kruttli (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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HOME PAGE: http://www.federalreserve.gov/econresdata/mathias-s-kruttli.htm

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

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Oxford, Oxfordshire OX2 6ED
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HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Phillip Monin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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