Thu, Oct 27, 2016
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

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. North America - Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation, Billionaire hedge fund titans Dinan, Lasry on election, markets and best investment ideas[more]

    Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation From Kyle Bass, founder of Hayman Capital Management, on Wednesday warned that the U.S. is headed toward so-called stagflation. Stagflation is typically described as persistently high inflation and hi

  2. David Einhorn speaks on passive investing, Mylan, his cheapest stock, the Fed[more]

    From Greenlight Capital hedge fund manager David Einhorn (Trades, Portfolio) joined nine other famed investors on Tuesday to talk about stocks at the annual Great Investors’ Best Ideas Investment Symposium in Dallas. Presenters at the annual conference typically pitch one or severa

  3. Investing - Fund set up to buy illiquid hedge fund stakes finds plenty of opportunities, Lansdowne's Roden says likes animal genetics company Genus[more]

    Fund set up to buy illiquid hedge fund stakes finds plenty of opportunities From As ValueWalk reported back in February, earlier this year Andrew Lawrence set out to raise $250 million to $500 million for a fund that will buy stakes in hedge funds that have suspended redem

  4. Other Voices: Follow the advice of investment consultants - I think not[more]

    Mark Rzepczynski, Founding Partner, Chief Investment Officer AMPHI Research and Trading, writes on Harvest Exchange: Investment consultants are a force to the reckoned with in the pension world. They advise and drive many pension decisions around the globe. Consultants literally control trillion

  5. Opalesque Roundtable: Style drift, poor communications and credibility fatigue are biggest red flags for hedge funds investors[more]

    Komfie Manalo, Opalesque Asia: Style drift, poor communications and credibility fatigue are the biggest red flags for hedge funds investors, said participants of the latest 2016 Opalesque Investor Roundtable, sponso