Hedge Fund Liquidity Management : Insights for Fund Performance and Systemic Risk Oversight

Using Form PF filings over 2013–2017, we find that funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets, have shorter-term commitments from investors and creditors, and when market volatility is greater. We also find that funds with low abnormal buffers – that is, with liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks, especially around earnings announcements. Our results highlight potential trade-offs between systemic risk-oriented policies requiring larger liquidity buffers and the impairment of regular price discovery in financial markets