Journal of Financial Economics Vol. 98 No. 1 2010
Liquidity risk and the cross-section of hedge-fund returns☆
Abstract
This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important determinant in the cross-section of hedge-fund returns. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually, on average, over the period 1994–2008, while negative performance is observed during liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and they are also robust to commonly used hedge-fund factors, none of which carries a significant premium during the sample period. These findings highlight the importance of understanding systematic liquidity variations in the evaluation of hedge-fund performance.
- DOI
- 10.1016/j.jfineco.2010.05.001
- Volume
- 98
- Issue
- 1
- Pages
- 54-71
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref