Hedge Fund Liquidity Management: Insights for Fund Performance

51 Pages Posted: 5 Jan 2021 Last revised: 23 Mar 2022

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

A. Tolga Ergun

Securities and Exchange Commission

Giulio Girardi

Securities and Exchange Commission

Date Written: March 22, 2022

Abstract

Using Form PF filings over 2013–2017, we find that hedge funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets, have shorter-term commitments from investors and creditors, and when market volatility is greater. Funds with low abnormal buffers – liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks, especially around earnings announcements. We conclude that managers with better investment opportunities utilize more of their capital and have lower liquidity buffers than their peers

Keywords: Liquidity buffer, hedge funds, fund performance, cash, borrowing

JEL Classification: G11, G23

Suggested Citation

Aragon, George O. and Ergun, A. Tolga and Girardi, Giulio, Hedge Fund Liquidity Management: Insights for Fund Performance (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=3734596 or http://dx.doi.org/10.2139/ssrn.3734596

George O. Aragon (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

A. Tolga Ergun

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

Giulio Girardi

Securities and Exchange Commission ( email )

Washington, DC
United States

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