Regulatory Uncertainty and the Hedge Fund Liquidity Circle

64 Pages Posted: 8 May 2023

See all articles by Michael Bowe

Michael Bowe

affiliation not provided to SSRN

Olga Kolokolova

Lancaster University Management School

Lijie Yu

The University of Manchester - Alliance Manchester Business School

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.

Suggested Citation

Bowe, Michael and Kolokolova, Olga and Yu, Lijie, Regulatory Uncertainty and the Hedge Fund Liquidity Circle. Available at SSRN: https://ssrn.com/abstract=4441402 or http://dx.doi.org/10.2139/ssrn.4441402

Michael Bowe

affiliation not provided to SSRN ( email )

No Address Available

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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