Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds

50 Pages Posted: 21 Dec 2017 Last revised: 9 Nov 2020

See all articles by Mathias S. Kruttli

Mathias S. Kruttli

Kelley Business School - Indiana University; University of Oxford - Oxford-Man Institute of Quantitative Finance

Phillip Monin

Board of Governors of the Federal Reserve System

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: December 15, 2017

Abstract

We show that when only a few investors contribute a substantial portion of a fund's equity, the probability of large liquidity-driven fund outflows increases because investors' idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we find the five largest investors on average own 50% of a hedge fund. Consistent with our predictions, we confirm that high investor concentration hedge funds are more likely to experience large liquidity-driven outflows. Such funds hold more precautionary cash and implement other portfolio adjustments that help absorb outflows, but result in lower risk-adjusted returns. We find no evidence that hedge funds with a concentrated investor base impose longer share restrictions.

Keywords: hedge funds, investor concentration, flows, precautionary cash

JEL Classification: G11, G20, G23

Suggested Citation

Kruttli, Mathias S. and Monin, Phillip and Watugala, Sumudu W., Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds (December 15, 2017). OFR 17-07, Available at SSRN: https://ssrn.com/abstract=3091191 or http://dx.doi.org/10.2139/ssrn.3091191

Mathias S. Kruttli

Kelley Business School - Indiana University ( email )

Bloomington, IN 47405
United States

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Phillip Monin (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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