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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Investor Concentration, Flows, and Cash Holdings : Evidence from Hedge Funds
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.
Cite this item
Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, Investor Concentration, Flows, and Cash Holdings : Evidence from Hedge Funds, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-121, 15 Dec 2017.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
Keywords: Investor concentration ; Hedge funds ; Flows ; Portfolio liquidity ; Precautionary cash
This item with handle RePEc:fip:fedgfe:2017-121
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