Hedge Fund Liquidity Management: Insights for Fund Performance and Systemic Risk Oversight

50 Pages Posted: 5 Jan 2021 Last revised: 22 Apr 2021

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: April 22, 2021

Abstract

Using Form PF filings over 2013–2017, we find that 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. We also find that funds with low abnormal buffers – that is, with 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. Our results highlight potential trade-offs between systemic risk-oriented policies requiring larger liquidity buffers and the impairment of regular price discovery in financial markets.

Keywords: Systemic risk, active investing, liquidity, hedge funds, performance, cash, borrowing

JEL Classification: G11, G23, G32

Suggested Citation

Aragon, George O. and Ergun, A. Tolga and Girardi, Giulio, Hedge Fund Liquidity Management: Insights for Fund Performance and Systemic Risk Oversight (April 22, 2021). 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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