Hedge Fund Crowds and Mispricing

Richard Sias (), H. J. Turtle () and Blerina Zykaj
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Richard Sias: Department of Finance, Eller College of Management, University of Arizona, Tucson, Arizona 85721
H. J. Turtle: Department of Finance and Real Estate, College of Business, Colorado State University, Fort Collins, Colorado 80523

Management Science, 2016, vol. 62, issue 3, 764-784

Abstract: Recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets. Inconsistent with this assertion, we find that hedge fund equity portfolios are remarkably independent. Moreover, when hedge funds do buy and sell the same stocks, their demand shocks are, on average, positively related to subsequent raw and risk-adjusted returns. Even in periods of extreme market stress, we find no evidence that hedge fund demand shocks are inversely related to subsequent returns. Our results have important implications for the ongoing debate regarding hedge fund regulation. This paper was accepted by Wei Jiang, finance.

Keywords: hedge funds; crowds; market efficiency (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (34)

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