Ownership crowded with style: Institutional investors, liquidity, and liquidity risk

This paper studies the institutional investor composition of U.S. stock ownership.There is a large cross-sectional and time-series variation in institutional investor ownership, which we decompose in mutual fund and hedge fund ownership, and further break down across different mutual fund styles and hedge fund investment strategies. The flows of funds towards different investor types, styles, and strategiesis very heterogeneous and largely uncorrelated. We find that institutional ownership generally predicts larger stock liquidity, and so does concentrated ownership with mutual funds and hedge funds. However, the effects on liquidity risk are the opposite. Stocks with concentrated institutional ownership and especially hedge fundownership tend to have low returns with high market illiquidity, suggesting that crowded trading strategies have a detrimental impact on returns when markets are less liquid. Consistent with this idea, the effects on liquidity dynamics depend on investment styles.