Regulatory uncertainty and the hedge fund liquidity circle

64 Pages Posted: 25 Nov 2019 Last revised: 19 Apr 2023

See all articles by Michael Bowe

Michael Bowe

University of Manchester

Olga Kolokolova

Lancaster University Management School

Lijie Yu

The University of Manchester - Alliance Manchester Business School

Date Written: November 13, 2019

Abstract

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

Bowe, Michael and Kolokolova, Olga and Yu, Lijie, Regulatory uncertainty and the hedge fund liquidity circle (November 13, 2019). Available at SSRN: https://ssrn.com/abstract=3486305 or http://dx.doi.org/10.2139/ssrn.3486305

Michael Bowe

University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 306 3407 (Phone)
+44 161 275 4023 (Fax)

Olga Kolokolova (Contact Author)

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Lijie Yu

The University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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