Hedge Fund Redemption Restrictions and Stock Price Fragility

43 Pages Posted: 15 Oct 2020

See all articles by Julia Reynolds

Julia Reynolds

University of Lugano - Institute of Finance

Date Written: August 7, 2020


This paper explores the idea that the increasing concentration of institutional ownership in equity markets makes stock prices more "fragile," i.e., more exposed to liquidity shocks to institutional investors. I argue that institutional stockholders with stricter redemption policies, who are less likely to experience redemption-generated liquidity shocks, should expose stocks to lower levels of price fragility. An analysis of hedge fund characteristics confirms that hedge funds with strict redemption policies exhibit less portfolio turnover, and stocks held by high-restriction funds are less exposed to flow-induced liquidity trading. A hand-collected dataset of institutional block acquisitions reveals comparatively higher cumulative abnormal returns following block acquisitions by hedge funds with tighter redemption restrictions, confirming that the market places a value on strict redemption policies. Finally, a difference-in-differences regression reveals that stocks purchased by institutional blockholders with stricter redemption policies experience a significant decrease in volatility.

Keywords: Price Fragility, Institutional Investors, Hedge Funds, Redemption Restrictions, Liquidity Shocks

JEL Classification: G10, G14

Suggested Citation

Reynolds, Julia, Hedge Fund Redemption Restrictions and Stock Price Fragility (August 7, 2020). Available at SSRN: https://ssrn.com/abstract=3681388 or http://dx.doi.org/10.2139/ssrn.3681388

Julia Reynolds (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano

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