Liquidity Provision and the Cross Section of Hedge Fund Returns

• 成果类型: Article
• 署名作者: Jame, Russell
• 署名单位: University of Kentucky
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2016.2687
• 发表日期: 2018
• 页码: 3288-3312
• 关键词: HEDGE FUNDS; liquidity provision; FUND PERFORMANCE

摘要

I investigate whether hedge funds that supply liquidity earn superior returns. Using transaction data, I find that hedge funds following short-term contrarian strategies (i.e., liquidity suppliers) earn significantly higher returns on their equity trades and holdings. Similarly, using commercial databases, I find that hedge funds with greater exposure to a liquidity provision factor earn significantly higher excess returns and Sharpe ratios. The superior performance of liquidity-supplying hedge funds arises from strategies that are more complex than mechanical short-term reversal strategies. For example, among stocks with similar past returns, liquidity-supplying funds are more likely to trade against stocks heavily traded by constrained mutual funds and less likely to trade against stocks heavily traded by unconstrained mutual funds. The outperformance of liquidity-supplying funds is also concentrated in periods of low funding liquidity, suggesting that less-binding financial constraints contribute to their superior returns.