The Evolving Beta-Liquidity Relationship of Hedge Funds

39 Pages Posted: 19 Mar 2012 Last revised: 10 Apr 2017

See all articles by Arjen Siegmann

Arjen Siegmann

Vrije Universiteit Amsterdam, School of Business and Economics

Denitsa Stefanova

Universite du Luxembourg

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Date Written: April 10, 2017

Abstract

Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds’ stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach, we find that equity-oriented hedge funds display a significant shift in liquidity-timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies, finding in them no evidence of a similar shift in liquidity timing.

Keywords: hedge funds, market timing, liquidity timing, changepoint regression, dynamic strategies

JEL Classification: G14, G18, G23

Suggested Citation

Siegmann, Arjen and Stefanova, Denitsa, The Evolving Beta-Liquidity Relationship of Hedge Funds (April 10, 2017). Available at SSRN: https://ssrn.com/abstract=2023924 or http://dx.doi.org/10.2139/ssrn.2023924

Arjen Siegmann

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, NOT IN US OR CANADA 1081 HV
Netherlands

HOME PAGE: http://https://research.vu.nl/en/persons/arjen-siegmann

Denitsa Stefanova (Contact Author)

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

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