Sat, Aug 23, 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

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. Institutions – Texas Employees sets 2015 tactical plan for alternatives, CalPERS' real estate consultant cautions the pension fund's investment committee, Why Sunsuper likes hedge funds[more]

    Texas Employees sets 2015 tactical plan for alternatives From PIOnline.com: Texas Employees Retirement System will invest in up to four new hedge funds in the next fiscal year, which begins Sept. 1. Trustees approved 2015 tactical investment plans for the hedge fund, private equity and in

  2. Private equity follows hedge funds into reinsurance for long-term capital[more]

    From Artemis.bm: It’s not just hedge funds that are entering the insurance and reinsurance market in search of so-called long-term capital to put to work in their strategies, private equity firms targeting the space are also seeking opportunities to add assets under management. The entry of large pr

  3. North America – New York City’s next hot neighborhoods targeted with property funds[more]

    From Bloomberg.com: New York’s real estate world is filled with tales of ordinary people who bought property decades ago and saw values skyrocket to the millions. Seth Weissman is seeking investors to get in early on the next hot neighborhoods. The veteran of Goldman Sachs Group Inc. and hedge

  4. Investing – George Soros bets $2bn on stock market collapse, Warren Buffett's Berkshire reveals Charter stake, cuts DirecTV, Hedge funds lusting to cash out of MGM, Top hedge fund managers are buying Ally Financial, Hedge funds dumped 5m Herbalife shares in Q2, Paulson & Co hedge fund ups Puerto Rico real estate bet, Netflix Inc., Citigroup Inc, Google Inc are top new picks in Tiger Management’s 13F[more]

    George Soros bets $2bn on stock market collapse From Newsmax.com: Billionaire investor George Soros has increased his financial bet that U.S. stocks will collapse to more than $2 billion. The legendary hedge fund manager has been raising his negative bet on the Standard & Poor's 500 Inde

  5. Investors now net short S&P500 and increased Russell shorts, technicals suggest further selling[more]

    Komfie Manalo, Opalesque Asia: Market Neutral funds increased their market exposure to -1% net short from -6% net short last week, according to Bank of America Merrill Lynch’s Hedge Fund Monitor. The report also added