Hedge fund crowds and mispricing

Richard Sias; H. J. Turtle; Blerina Zykaj

doi:10.1287/mnsc.2014.2131

Hedge fund crowds and mispricing

Richard Sias, H. J. Turtle, Blerina Zykaj

Finance

Research output: Contribution to journal › Article › peer-review

57 Scopus citations

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.

Original language	English (US)
Pages (from-to)	764-784
Number of pages	21
Journal	Management Science
Volume	62
Issue number	3
DOIs	https://doi.org/10.1287/mnsc.2014.2131
State	Published - Mar 2016

Keywords

Crowds
Hedge funds
Market efficiency

ASJC Scopus subject areas

Strategy and Management
Management Science and Operations Research

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10.1287/mnsc.2014.2131

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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.",

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AB - 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.

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KW - Market efficiency

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Hedge fund crowds and mispricing

Abstract

Keywords

ASJC Scopus subject areas

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