The Impact of Hedge Funds on Asset Markets

Matthias Kruttli, Andrew Patton and Tarun Ramadorai

No 13-27, Working Papers from Duke University, Department of Economics

Abstract: While there has been enormous interest in hedge funds from academics, prospective and current investors, and policymakers, rigorous empirical evidence of their impact on asset markets has been difficult to find. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2011 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model to rationalize our findings, and empirically verify auxiliary predictions of the model.

Keywords: hedge funds; return predictability; liquidity; equities; bonds; currencies (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G23 (search for similar items in EconPapers)
Pages: 58
Date: 2013
New Economics Papers: this item is included in nep-fmk and nep-for
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Related works:
Journal Article: The Impact of Hedge Funds on Asset Markets (2015)
Working Paper: The Impact of Hedge Funds on Asset Markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:13-27

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