Liquidity risk and the cross-section of hedge-fund returns

Ronnie Sadka

Journal of Financial Economics, 2010, vol. 98, issue 1, 54-71

Abstract: This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important determinant in the cross-section of hedge-fund returns. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually, on average, over the period 1994-2008, while negative performance is observed during liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and they are also robust to commonly used hedge-fund factors, none of which carries a significant premium during the sample period. These findings highlight the importance of understanding systematic liquidity variations in the evaluation of hedge-fund performance.

Keywords: Liquidity; risk; Hedge; funds; Price; impact; Asset; pricing (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (135)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:98:y:2010:i:1:p:54-71

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