Hedge-Fund Performance and Liquidity Risk

Can Liquidity Risk Explain Diseconomies of Scale in Hedge Funds?

Quarterly Journal of Finance ◽

10.1142/s2010139217500021 ◽

2017 ◽

Vol 07 (02) ◽

pp. 1750002

Author(s):

Hany A. Shawky ◽

Ying Wang

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Liquidity Risk ◽

Fund Performance ◽

Diseconomies Of Scale ◽

Liquidity Crises ◽

Using Data ◽

Asset Size ◽

Hedge Fund Performance

Using data from the Lipper TASS hedge fund database over the period 1994–2012, we examine the role of liquidity risk in explaining the relation between asset size and hedge fund performance. While a significant negative size-performance relation exists for all hedge funds, once we stratify our sample by liquidity risk, we find that such a relationship only exists among funds with the highest liquidity risk. Liquidity risk is found to be another important source of diseconomies of scale in the hedge fund industry. Evidently, for high liquidity risk funds, large funds are less able to recover from the relatively more significant losses incurred during market-wide liquidity crises, resulting in lower performance for large funds relative to small funds.

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The European hedge funds industry: An empirical analysis of performance, liquidity, and growth

Corporate Governance and Sustainability Review ◽

10.22495/cgsrv5i2p8 ◽

2021 ◽

Vol 5 (2) ◽

pp. 89-101

Author(s):

Soumaya Ben Khelifa

Keyword(s):

Hedge Funds ◽

Economic Value ◽

Hedge Fund ◽

Liquidity Risk ◽

Fund Performance ◽

Market Liquidity ◽

Share Restrictions ◽

And Performance ◽

Hedge Fund Performance ◽

Analysis Of 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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