Sat, Jan 31, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Alternative Market Briefing

Liquidity risk as a predictor of hedge fund performance

Tuesday, August 30, 2011

amb
Ronnie Sadka
By Florian Guldner, Opalesque Asia:

The impact of illiquidity risk on hedge fund returns has been discussed in many studies before. A new research paper published by Ronnie Sadka, Boston College suggests that hedge funds with a significant load on illiquidity risk outperformed low-loading funds by 6.5% annually in the period 1994 - 2009. He also estimates liquidity risk betas for different strategies and explains practical implications for risk management and manager selection.

Liquidity risk and portfolio returns Analyzing 12-month portfolios of hedge funds in the Lipper/TASS database, Sadka shows that a high-liquidity-loading portfolio has the highest annual average return of 10.61%, compared to a low-liquidity-loading portfolio return of 3.93%. He finds that returns generally increase with the liquidity-loading of a portfolio. The results using this methodology imply that illiquidity risk does not only pay a risk premium, but can also be used as a predictor of hedge fund performance.

Liquidity beta or manager skill? Sadka believes that illiquidity premiums account for large parts of the return considered manager alpha. His approach to proxy for the liquidity factor indicates that hadge fund alpha drops by about 11% once controlling for liquidity risk.

Sadka concludes that "...Liquidity risk also explains a considerable amount of the alpha of dif......................

To view our full article Click here

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: Ex-Citi trader launches 'sleep-at-night’ long/short equity fund[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: After working at Citi's proprietary trading desk, managing a large portfolio between 2008 and 2011, Joel S. Salomon founded SalaurMor Management in New Yor

  2. Investing - U.S. investors favor currency hedged Europe ETFs as euro tumbles, Quants win back investors as Swiss franc fuels volatility gains, David Einhorn's $7bn hedge fund is loading up on this stock, Hedge fund BlueMountain Capital unveils Ocwen Financial short, claims default on notes[more]

    U.S. investors favor currency hedged Europe ETFs as euro tumbles From Reuters.com: U.S. investors stung by the falling euro who want to stay invested in Europe are turning to exchange-traded funds designed to strip out the impact of the region's currency. The biggest among so-called "cur

  3. News Briefs - Millennials use tech tools to jump into investing, Winklevoss twins to launch bitcoin exchange with FDIC insured deposits, Robertson’s legacy from hedge funds to New Zealand, Real estate managers exploring smaller open-end funds[more]

    Millennials use tech tools to jump into investing It is the Facebookification of monetary investing. From social networking platforms that enable young investors to stick to every other's stock-picking mojo, to internet sites for initially-timers hungry for a piece of the Silicon Valley

  4. Update: Prosecutors seek 12 years for hedge fund manager Francisco Illarramendi[more]

    Komfie Manalo, Opalesque Asia: Federal prosecutors have asked the court to sentence convicted hedge fund manager Francisco Illarramendi to 12 years imprisonment for running an elaborate Ponzi scheme that bilked investors hundreds of millions in dollars, including a Venezuelan pension fund, report

  5. Institutions - Ontario pension fund leader calls all asset classes ‘expensive’, Taiwan's BLF plans $2bn in alternative mandates[more]

    Ontario pension fund leader calls all asset classes ‘expensive’ From WSJ.com: The head of one of the world’s largest pension funds said that across asset classes, “everything is expensive.” Ron Mock, who leads Canada’s $141 billion Ontario Teachers’ Pension Plan, said that the plan would