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Hedge funds and discretionary liquidity restrictions

Adam Aiken, Christopher P. Clifford and Jesse A. Ellis

Journal of Financial Economics, 2015, vol. 116, issue 1, 197-218

Abstract: We study hedge funds that imposed discretionary liquidity restrictions (DLRs) on investor shares during the financial crisis. DLRs prolong fund life, but impose liquidity costs on investors, creating a potential conflict of interest. Ostensibly, funds establish DLRs to limit performance-driven withdrawals that could force fire sales of illiquid assets. However, after they restrict investor liquidity, DLR funds do not reduce illiquid stock sales and underperform a control sample of non-DLR funds. Consequently, DLRs appear to negatively impact fund family reputation. After the crisis, funds from DLR families faced difficulties raising capital and were more likely to cut their fees.

Keywords: Hedge funds; Liquidity; Discretionary liquidity (search for similar items in EconPapers)
JEL-codes: G10 G23 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.jfineco.2015.01.002

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