Can hedge funds time market liquidity?
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Lo_Can hedge.pdf
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968.01 KB
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Author(s)
Cao, Charles
Chen, Yong
Liang, Bing
Lo, Andrew W.
Date Issued
April 2013
Journal
Journal of Financial Economics
Publisher
Elsevier
Citation
Cao, Charles, Yong Chen, Bing Liang, and Andrew W. Lo. “Can Hedge Funds Time Market Liquidity?” Journal of Financial Economics 109, no. 2 (August 2013): 493–516. © 2013 Elsevier B.V.
Version
Final published version
Abstract
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, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.
MIT Department
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1016/j.jfineco.2013.03.009
