Share Restrictions, Risk Taking and Hedge Fund Performance

While the performance of hedge funds has grabbed much attention from researchers, a few studies have been conducted on the drivers of hedge fund liquidity and performance (Shaub & Schmid, 2013). This study proposes new approaches to investigate the effect of share restrictions on European hedge fund performance and liquidity. We run different regressions of 1) returns, 2) flows, and 3) exposure to market liquidity risk on share restrictions, managerial incentives, and a set of control variables as independent variables. Using a sample of 1423 European hedge funds, our results suggest that restrictions imposed by European hedge funds add economic value to investors. Furthermore, we find that European hedge funds with strong share restrictions take on lower liquidity risk. There is a weak difference in liquidity risk exposure across directional European hedge funds with and without share restrictions. In addition, European hedge funds’ experience, large outflows during a crisis, and all share restrictions do not seem to be significantly related to funding flows in the crisis period, as well as in times of non-crisis. Finally, only the groups of young funds are associated with significant funds exposure to market liquidity risk

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Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018000200 ◽

2018 ◽

Vol 53 (5) ◽

pp. 2199-2225 ◽

Cited By ~ 5

Author(s):

Zheng Sun ◽

Ashley W. Wang ◽

Lu Zheng

Keyword(s):

Performance Measures ◽

Hedge Fund ◽

Fund Performance ◽

Performance Persistence ◽

Market Conditions ◽

Share Restrictions ◽

Hedge Fund Performance ◽

Sector Returns

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by approximately 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN measure can predict future fund performance over a horizon as long as 3 years, for both winners and losers and for funds with few share restrictions.

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