Regulatory uncertainty and the hedge fund liquidity circle
64 Pages Posted: 25 Nov 2019 Last revised: 19 Apr 2023
Date Written: November 13, 2019
Enhanced regulatory oversight and greater regulatory uncertainty in the aftermath of the 2007/08 financial crisis contribute to changes in the liquidity provision profile of hedge funds. Analysing a sample of 1,624 funds operating during these major shifts in regulatory policy, we find that hedge funds reduce their market liquidity exposure and realign their market-making activities towards liquid stocks. These effects are more pronounced for funds with higher flow-performance sensitivity and mitigated for funds with low operational risks and those connected to the largest US-based prime brokers.
Keywords: Regulatory risk, Hedge funds, Liquidity risk, Liquidity provision, Fund flows
JEL Classification: G1, G18, G2, G23, G28
Suggested Citation: Suggested Citation