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Hedge Fund Crowds and Mispricing

Author

Listed:
  • Richard Sias

    (Department of Finance, Eller College of Management, University of Arizona, Tucson, Arizona 85721)

  • H. J. Turtle

    (Department of Finance and Real Estate, College of Business, Colorado State University, Fort Collins, Colorado 80523)

  • Blerina Zykaj

    (Department of Finance, College of Business Administration, University of Toledo, Toledo, Ohio 43606)

Abstract

Recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets. Inconsistent with this assertion, we find that hedge fund equity portfolios are remarkably independent. Moreover, when hedge funds do buy and sell the same stocks, their demand shocks are, on average, positively related to subsequent raw and risk-adjusted returns. Even in periods of extreme market stress, we find no evidence that hedge fund demand shocks are inversely related to subsequent returns. Our results have important implications for the ongoing debate regarding hedge fund regulation. This paper was accepted by Wei Jiang, finance.

Suggested Citation

  • Richard Sias & H. J. Turtle & Blerina Zykaj, 2016. "Hedge Fund Crowds and Mispricing," Management Science, INFORMS, vol. 62(3), pages 764-784, March.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:3:p:764-784
    DOI: 10.1287/mnsc.2014.2131
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    References listed on IDEAS

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