Do Hedge Funds Profit From Mutual-Fund Distress?

Joseph Chen, Samuel Hanson, Harrison Hong and Jeremy Stein

No 13786, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the question of whether hedge funds engage in front-running strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds -- those suffering large outflows of assets under management -- are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individual stock level, short interest rises in advance of sales by distressed mutual funds.

JEL-codes: G12 G20 G31 H0 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-fmk
Note: CF PR AP
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Citations: View citations in EconPapers (44)

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