Do Hedge Fund Fire Sales Disrupt the Stock Market?

Abstract

Using a comprehensive dataset of hedge fund 13F filings, we analyze hedge fund trading from 1998-2010 to determine if investor redemptions cause fire sales and stock market disruptions. We find evidence of hedge fund fire sales in the two quarters with the worst stock market performance. During these quarters, fire sales are concentrated among low liquidity stocks and typically involve hedge funds with a preference for holding low liquidity stocks. Fire sales comprise a relatively small proportion of hedge fund portfolios, reducing performance for these funds but having a negligible impact on overall stock market performance.

Keywords: Liquidity shocks, fire sales, financial crisis, hedge funds

JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61