Fri, Apr 18, 2014
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

Banner
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: Classic Auto Funds Limited (CAF) launches several car investing funds[more]

    Bailey McCann, Opalesque New York: A new trend in alternative alternatives is emerging - car appreciation funds. Classic Auto Funds Limited (CAF) is the first to market with several funds that make super elite luxury cars into real asset investments. As a result of growing overseas demand couple

  2. Investing – Big hedge funds bought Puerto Rico's junk bonds, Fidelity explores new trading venue amid flash trade concerns, Crisis-era Greek bonds reward early buyers with big effective returns, Cargill unit discloses stake in Freddie preferred[more]

    Big hedge funds bought Puerto Rico's junk bonds From Reuters.com: Several large hedge funds doubled down on Puerto Rico in last month's giant bond sale despite the U.S. territory's financial struggles, the Wall Street Journal reported, citing confidential documents reviewed by the newspa

  3. Opalesque Exclusive: Hedge fund replicators evolve[more]

    Bailey McCann, Opalesque New York: Hedge fund replicators as a group of products tend to get a bad rap from hedge fund managers who suggest that the best a replicator can offer is dynamic beta capture. A

  4. Opalesque Exclusive: Pensions, endowments, family offices reconsider life settlement investments[more]

    Bailey McCann, Opalesque New York: Hedge funds were once the largest investors in the life settlement industry, now the industry is seeing more interest from pensions, endowments and family offices directly. Life settlements have always been considered a niche part of the investing landscape, an

  5. SEC allows investment funds to use social media[more]

    Bailey McCann, Opalesque New York: The Securities and Exchange Commission (SEC) has released new guidance letting investment funds and advisors use social media to promote client reviews. The guidance seeks to assist investment managers in developing compliance policies and procedures reasonably