Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds

Mathias S. Kruttli (), Phillip J. Monin () and Sumudu Watugala
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Mathias S. Kruttli: Federal Reserve Board
Phillip J. Monin: Office of Financial Research

No 17-07, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We show that when only a few investors own a substantial portion of a hedge fund's net asset value, flow volatility increases because investors' exogenous, idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we confirm that high investor concentration hedge funds experience more volatile flows. These hedge funds hold more cash and liquid assets, which help absorb large, unexpected outflows. Such funds have to pay a liquidity premium and generate lower risk-adjusted returns. Investor concentration does not affect flow-performance sensitivity. These results are robust to including lock-up and redemption periods, strategy, manager ownership, and other controls.

Keywords: Hedge funds; investor concentration; flows; precautionary cash; portfolio liquidity (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-12-15, Revised 2020-06-02
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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Working Paper: Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds (2017)
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