In this paper, we show that hedge funds repurchased a large amount of liquid stocks and continued to sell illiquid stocks as the 2008 financial crisis mitigated. It complements existing empirical evidence that institutional investors sold more liquid than illiquid assets during the crisis period. This new empirical evidence confirms the trade-off in theoretical literature between selling liquid assets to minimize contemporary trading costs and selling illiquid assets to keep a \liquidity cushion” (e.g. Scholes 2000; Duffie and Ziegler 2003; Brown, Carlin, and Lobo 2010). Consistently, hedge funds’ portfolio composition shows a delayed “flight to liquidity”: the proportion of hedge funds’ liquid
stock holdings decreased slightly at the peak of the crisis and then increased substantially to a highest level ever since 2007. For comparison, we show that pension funds have a nearly constant portfolio composition of liquid versus illiquid stocks through the entire crisis.

JEL classication: G11; G23
Keywords: Liquidity Management; Hedge funds; Flight to liquidity; Price impact