Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis

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

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2023-2027           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

B20180327_logo_PGB-Pensioendiensten_grijswaarden
B20160708_aegon
B20160708_maastricht university
B20160708_B20160615_Stichting-van-de-Arbeid-logo
B20160708_radboud
Bekijk al onze partners