Scientific article
OA Policy
English

Liquidity Risk, Return Predictability, and Hedge Funds' Performance: An Empirical Study

Published inJournal of financial and quantitative analysis, vol. 48, no. 1, p. 219-244
Collection
  • Open Access - Licence nationale Cambridge University Press
Publication date2013
Abstract

This article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios. Similarly to Avramov, Kosowski, Naik, and Teo (2007),(2011), we observe that, before accounting for the effect of liquidity risk, hedge fund portfolios that incor- porate predictability in managerial skills generate superior performance. This outperfor-mance disappears or weakens substantially for most emerging markets, event-driven, and long/short hedge fund portfolios once we account for liquidity risk. Moreover, we show that the equity market-neutral and long/short hedge fund portfolios' “alphas” also entail rents for their service as liquidity providers. These results hold under various robustness tests.

Keywords
  • Hedge funds
  • Liquidity risk
  • Predictability
  • Rents for liquidity provision
  • Managerial skills
Citation (ISO format)
GIBSON BRANDON, Rajna Nicole, WANG, Songtao. Liquidity Risk, Return Predictability, and Hedge Funds” Performance: An Empirical Study. In: Journal of financial and quantitative analysis, 2013, vol. 48, n° 1, p. 219–244. doi: 10.1017/S0022109012000634
Main files (2)
Article (Accepted version)
accessLevelPublic
Article (Published version)
Identifiers
Journal ISSN0022-1090
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418downloads

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