We study hedge funds that imposed discretionary liquidity restrictions (DLRs) on investor shares during the financial crisis. DLRs prolong fund life, but impose liquidity costs on investors, creating a potential conflict of interest. Ostensibly, funds establish DLRs to limit performance-driven withdrawals that could force fire sales of illiquid assets. However, after they restrict investor liquidity, DLR funds do not reduce illiquid stock sales and underperform a control sample of non-DLR funds. Consequently, DLRs appear to negatively impact fund family reputation. After the crisis, funds from DLR families faced difficulties raising capital and were more likely to cut their fees.
|Number of pages||22|
|Journal||Journal of Financial Economics|
|State||Published - Apr 1 2015|
Bibliographical notePublisher Copyright:
© 2015 Elsevier B.V.
- Discretionary liquidity
- Hedge funds
ASJC Scopus subject areas
- Economics and Econometrics
- Strategy and Management