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Can Hedge Funds Time Liquidity?, Charles Cao, Yong Chen, Bing Liang, Andrew W. Lo
Can Hedge Funds Time Liquidity?, Charles Cao, Yong Chen, Bing Liang, Andrew W. Lo
Research Collection BNP Paribas Hedge Fund Centre
We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, …