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The evolving beta-liquidity relationship of hedge funds

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  • Siegmann, Arjen
  • Stefanova, Denitsa

Abstract

Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds’ stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach, we find that equity-oriented hedge funds display a significant shift in liquidity-timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies, finding in them no evidence of a similar shift in liquidity timing.

Suggested Citation

  • Siegmann, Arjen & Stefanova, Denitsa, 2017. "The evolving beta-liquidity relationship of hedge funds," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 286-303.
    • Handle: RePEc:eee:empfin:v:44:y:2017:i:c:p:286-303
    DOI: 10.1016/j.jempfin.2017.04.002
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    More about this item

    Keywords

    Hedge funds; Market timing; Liquidity timing; Changepoint regression; Dynamic strategies;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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