Abstract
We propose two approaches to examine whether European hedge fund managers can time market liquidity. Using a sample of 1616 European hedge funds, we find evidence of liquidity-timing. More importantly, this ability adds economic value to investors. Thus, it represents valuable managerial skill and a major source of European hedge funds’ performance. Also we show that the majority of these funds demonstrate liquidity-timing ability especially during liquidity crisis. Finally, it emerged that our main evidence of liquidity-timing remains significant after controlling for market-timing and volatility-timing.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Center for International Securities and Derivatives Markets(CISDM); Hedge Fund Intelligence; EUREKAHEDGE.
Bankruptcy of LTCM.
We construct SMB t and HML t using the methodology of Fama and French (1993).
We construct MOM t+1 using the methodology of Carhart (1997).
We choose these three bond indices for several reasons: First Cappocci and Hubner (2004) show that hedge funds invest in these types of bonds. Second, the fixed income securities represent more than one-third of traded instruments.
We choose the Next 150 Index as a proxy for the European stock market. It represents large- and medium-sized companies listed on Euronext Markets.
References
Acharya, V. and Pedersen, L. (2005) Asset pricing with liquidity risk. Journal of Financial Economics 77(2): 375–410.
Agarwal, V. (2001) Intertemporal Variation in the Performance of Hedge Funds Employing a Contingent-Claim-based Benchmark. London Business School, Working Paper.
Agarwal, V. and Naik, N.Y. (2002) Characterizing Systematic Risk of Hedge Funds with Buy-and-Hold and Option Based Strategies. London Business School, Working Paper.
Agarwal, V., Daniel, N. and Naik, N. (2009) Role of managerial incentives and discretion in hedge fund performance. Journal of Finance 64(5): 2221–2256.
Amihud, Y. (2002) Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets 5(1): 31–56.
Amin, G. and Kat, H. (2003) Hedge fund performance 1990–2000: Do the ‘money machines’ really add value. Journal of Financial and Quantitative Analysis 38(1): 251–274.
Aragon, G. and Strahan, P. (2012) Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy. Journal of Financial Economics 103(3): 570–587.
Ben-David, I., Franzoni, F. and Moussawi, R. (2010) The Behavior of Hedge Funds During Liquidity Crises, Ohio State University, ResearchGate, Working Paper.
Bollen, N. and Whaley, R. (2009) Hedge fund risk dynamics: Implications for performance appraisal. The Journal of Finance 64(2): 985–1035.
Brophy, D., Ouimet, P. and Sialm, C. (2009) Hedge funds as investors of last resort? Review of Financial Studies 22(2): 541.
Brunnermeier, M. and Pedersen, L. (2009) Market liquidity and funding liquidity. Review of Financial Studies 22(6): 2201–2238.
Busse, J.A. (1999) Volatility timing in mutual funds: Evidence from daily returns. Review of Financial Studies 12(5): 1009–1041.
Cao, C., Chen, Y., Liang, B. and Lo, A. (2009) Can Hedge Funds Time Market Liquidity? Social Science Research Network, Working Paper.
Cao, C. (2011) Volatility Timing in the Emerging Market Hedge Funds Indices, Social Science Research Network, Working Paper.
Cao, C., Chen, Y., Liang, B. and Lo, A. (2013) Can hedge funds time marketliquidity? Journal of Financial Economics 109(2): 493–516.
Cappocci, D. (2004) Introduction aux hedge funds. Amazon. fr: Economica.
Cappocci, D. and Hubner, G. (2004) An analysis of hedge fund performance. Journal of Empirical Finance 11(1): 55–89.
Carhart, M. (1997) On persistence in mutual fund performance. Journal of Finance 52(1): 57–82.
Chen, Y. (2008) Timing ability in the focus market of hedge funds. Journal of Investment Management 5(2): 66–98.
Chen, Y. and Liang, B. (2007) Do market timing hedge funds time the market? Journal of Financial and Quantitative Analysis 42(4): 827–856.
Fama, E.F. and French, K.R. (1993) Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33(1): 3–56.
Fama, E.F. and French, K.R. (1996) Multifactor explanations of asset pricing anomalies. Journal of Finance 51(1): 55–84.
Fama, E.F. and French, K.R. (1998) Value versus growth: The international evidence. Journal of Finance 53(6): 1975–1999.
Fung, W. and Hsieh, D.A. (2001) The risk in hedge fund strategies: Theory and evidence from trend followers. Review of Financial Studies 14(2): 313–341.
Fung, W. and Hsieh, D.A. (2004) Hedge fund benchmarks: A risk based approach. Financial Analyst Journal 60(5): 65–80.
Goyenko, R.Y., Holden, C.W. and Trzcinka, C.A. (2009) Do liquidity measures measure liquidity? Journal of Financial Economics 92(2): 153–181.
Gromb, D. and Vayanos, D. (2002) Equilibrium and welfare in markets with financially constrained arbitrageurs. Journal of Financial Economics 66(2–3): 361–407.
Holmes, K.A. and Faff, R.W. (2004) Stability, asymmetry and seasonality of fund performance: An analysis of Australian multi-sector managed funds. Journal of Business Finance & Accounting 31(3–4): 539–578.
Jylha, P., Rinne, K. and Suominen, M. (2014) Do hedge funds supply or demand liquidity? Review of Finance 18(4): 1259–1298.
Kosowski, R., Naik, N. and Teo, M. (2007) Do hedge funds deliver alpha? A Baysian and bootstrap analysis. Journal of Financial Economics 84(1): 229–264.
Mitchell, M. and Pulvino, T. (2001) Characteristics of risk in risk arbitrage. Journal of Finance 56(6): 2135–2175.
Nagel, S. (2012) Evaporating liquidity. Review of Financial Studies 25(7): 2005–2039.
Pastor, L. and Stambaugh, R. (2003) Liquidity risk and expected stock returns. Journal of Political Economy 111(3): 642–685.
Rinne, K. and Suominen, M. (2010) Short Term Reversals, Returns to Liquidity Provision and the Costs of Immediacy, Webmeets, Working Paper.
Sadka, R. (2009) Liquidity Risk and the Cross-Section of Expected Hedge-Fund Returns, ResearchGate, Working Paper.
Shleifer, A. and Vishny, R.W. (1997) The limits of arbitrage. Journal of Finance 52(1): 35–55.
Siegmann, A. and Stefanova, D. (2011) Market Liquidity and Exposure of Hedge Funds, Social Science Research Network, Working Paper.
Treynor, J. and Mazuy, K. (1966) Can mutual funds outguess the market? Harvard Business Review 44: 131–136.
Vayanos, D. (2004) Flight to Quality, Flight to Liquidity, and the Pricing of Risk, London School of Economics, Social Science Research Network, Working Paper.
Author information
Authors and Affiliations
Corresponding author
Additional information
1is Contractual Assistant Professor of Finance at the Institut des Hautes Etudes Commerciales de Carthage and she is a member of the LEFA-IHEC. She is graduated from IHEC Carthage to the level of a PhD degree in Finance in April 2016. Her areas of research are: Asset Pricing, Hedge Funds, International Finance, Market Finance … She has mainly published in The journal of Private Equity and she has presented research papers in international conferences in France and Tunisia.
2is a full Professor of Finance at the Institut des Hautes Etudes Commerciales de Carthage. She is in charge of the Finance Department and the Master of Research in Finance at the same institution. She has a PhD of the Paris Dauphine University. Her fields of interest are Corporate governance, Mergers & Acquisitions, Market Microstructure, … Her main publications are in The Journal of Private Equity; Review of Middle East Economics and Finance; Journal of Financial Regulation and Compliance, The International Journal of Business and Finance Research; Journal of Money, Investment and Banking; Electronic Markets, The International Journal.
Rights and permissions
About this article
Cite this article
Ben Khelifa, S., Mezzez Hmaied, D. Do European hedge fund managers time market liquidity?. J Asset Manag 17, 393–407 (2016). https://doi.org/10.1057/jam.2016.21
Published:
Issue Date:
DOI: https://doi.org/10.1057/jam.2016.21