Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds
50 Pages Posted: 21 Dec 2017 Last revised: 9 Nov 2020
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Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds
Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds
Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds
Date Written: December 15, 2017
Abstract
We show that when only a few investors contribute a substantial portion of a fund's equity, the probability of large liquidity-driven fund outflows increases because investors' idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we find the five largest investors on average own 50% of a hedge fund. Consistent with our predictions, we confirm that high investor concentration hedge funds are more likely to experience large liquidity-driven outflows. Such funds hold more precautionary cash and implement other portfolio adjustments that help absorb outflows, but result in lower risk-adjusted returns. We find no evidence that hedge funds with a concentrated investor base impose longer share restrictions.
Keywords: hedge funds, investor concentration, flows, precautionary cash
JEL Classification: G11, G20, G23
Suggested Citation: Suggested Citation