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Investor Interest and Hedge Fund Returns

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  • Ramadorai, Tarun

Abstract

Employing a new dataset of over 9,000 expressed demands for over 700 hedge funds from a secondary market for hedge funds, this paper finds evidence suggesting that hedge fund investors rationally anticipate future hedge fund performance. Both buy and sell indications of interest arrive following periods of fund outperformance. Buy (sell) indications have some forecasting power for increases (decreases) in hedge fund performance, over and above other well-known forecasting variables. This information in investor demand co-exists with the presence of capacity constraints in hedge fund returns, confirming two main assumptions of Berk and Green (2004).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8092.

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Date of creation: Nov 2010
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Handle: RePEc:cpr:ceprdp:8092

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Keywords: capacity constraints; flows; hedge funds; information;

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References

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  1. Sadka, Ronnie, 2010. "Liquidity risk and the cross-section of hedge-fund returns," Journal of Financial Economics, Elsevier, vol. 98(1), pages 54-71, October.
  2. Fung, William & Hsieh, David A & Naik, Narayan & Ramadorai, Tarun, 2006. "Hedge Funds: Performance, Risk and Capital Formation," CEPR Discussion Papers 5565, C.E.P.R. Discussion Papers.
  3. Campbell, John & Schwartz, Allie & Ramadorai, Tarun, 2009. "Caught on Tape: Institutional Trading, Stock Returns, and Earnings Announcements," Scholarly Articles 2609649, Harvard University Department of Economics.
  4. Malmendier, Ulrike & Shanthikumar, Devin, 2007. "Are small investors naive about incentives?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 457-489, August.
  5. Chakravarty, Sugato, 2001. "Stealth-trading: Which traders' trades move stock prices?," Journal of Financial Economics, Elsevier, vol. 61(2), pages 289-307, August.
  6. Narayan Y. Naik & Tarun Ramadorai & Maria Stromqvist, 2007. "Capacity Constraints and Hedge Fund Strategy Returns," European Financial Management, European Financial Management Association, vol. 13(2), pages 239-256.
  7. Jotikasthira, Chotibhak & Lundblad, Christian T. & Ramadorai, Tarun, 2009. "Asset fire sales and purchases and the international transmission of financial shocks," CEPR Discussion Papers 7595, C.E.P.R. Discussion Papers.
  8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  9. Tarun Ramadorai, 2012. "The Secondary Market for Hedge Funds and the Closed Hedge Fund Premium," Journal of Finance, American Finance Association, vol. 67(2), pages 479-512, 04.
  10. Joshua D. Coval & Erik Stafford, 2005. "Asset Fire Sales (and Purchases) in Equity Markets," NBER Working Papers 11357, National Bureau of Economic Research, Inc.
  11. Liang, Bing, 2000. "Hedge Funds: The Living and the Dead," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 309-326, September.
  12. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  13. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
  14. Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2007. "Do hedge funds deliver alpha? A Bayesian and bootstrap analysis," Journal of Financial Economics, Elsevier, vol. 84(1), pages 229-264, April.
  15. Soeren Hvidkjaer, 2006. "A Trade-Based Analysis of Momentum," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 457-491.
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