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

57 Pages Posted: 21 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

Government of the United States of America, Department of the Treasury, Office of Financial Research

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 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.

Keywords: hedge funds, investor concentration, flows, precautionary cash, portfolio liquidity

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 15, 2017). OFR 17-07. Available at SSRN: https://ssrn.com/abstract=3091191 or http://dx.doi.org/10.2139/ssrn.3091191

Mathias S. Kruttli

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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

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

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

HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Phillip Monin (Contact Author)

Government of the United States of America, Department of the Treasury, Office of Financial Research ( email )

717 14th St NW
Washington, DC 20005
United States

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
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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