Thu, Sep 3, 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. Cliff Asness attracts $360 million as liquid alternative funds hold up[more]

    From Bloomberg.com: As U.S. stocks suffered their worst month in more than three years in August, Clifford Asness’s managed futures fund was able to profit. Investors are taking notice. The $9.12 billion AQR Managed Futures Strategy Fund pulled in an estimated $360 million in net subscriptions last

  2. Opalesque Exclusive: When the SEC calls, fund managers need to get out of their own way[more]

    Bailey McCann, Opalesque New York: New pressure is hitting alternative investment funds from all angles. So far this month both hedge fund and private equity players have seen enforcement actions, and subsequent fines over fees, disclosures, and misleading statements. Citi one of the biggest

  3. Performance - Einhorn and Loeb's hedge funds both decline 5% in August, Some target-date funds miss in the market turmoil[more]

    Einhorn and Loeb's hedge funds both decline 5% in August From Reuters.com: Hedge fund billionaires David Einhorn and Daniel Loeb saw their main funds lose roughly 5 percent in August during a dramatic market sell off, two people familiar with their returns said on Monday. Einhorn's

  4. Fortress hedge fund manager David Dredge says markets trouble on the way[more]

    From AFR.com: David Dredge of global hedge fund Fortress has built a career studying, predicting and protecting against the world's major financial crises. The recent convulsions in global sharemarkets are "just the beginning" of a painful adjustment as money drains from the emerging market economie

  5. North America - Puerto Rico agency plans talks with hedge fund creditors[more]

    From WSJ.com: Puerto Rico’s Government Development Bank is planning to begin confidential debt-restructuring talks with hedge funds that own its bonds as early as next week, said a person familiar with the matter. The parties are set to discuss a plan under which the investors would lend additional

 

banner