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Finance and Financial Management

Research Collection BNP Paribas Hedge Fund Centre

Series

Market liquidity

Publication Year

Articles 1 - 2 of 2

Full-Text Articles in Business

The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo Apr 2011

The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79 percent per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the TED spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping with an agency explanation, funds with strong incentives to raise capital, low manager option deltas, and no manager capital co-invested are …


Liquidity And Hedge Funds, Melvyn Teo Apr 2009

Liquidity And Hedge Funds, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

Market liquidity profoundly impacts hedge funds. Funds trading illiquid securities earns significant risk premium, report smoother returns, can better leverage on information asymmetries, and grapple with stronger capacity constraints. Importantly, the funding liquidity of hedge funds, or their ease of obtaining financing, can have a significant effect on the market liquidity of the securities they trade in, creating a downward liquidity spiral during economic downturns. We review the academic literature and deliver insights that resonate with recent market events.