Hedge funds and discretionary liquidity restrictions

Adam L. Aiken; Christopher P. Clifford; Jesse A. Ellis

doi:10.1016/j.jfineco.2015.01.002

Hedge funds and discretionary liquidity restrictions

Adam L. Aiken, Christopher P. Clifford, Jesse A. Ellis

Finance and Quantitative Methods

Research output: Contribution to journal › Article › peer-review

31 Scopus citations

Abstract

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.

Original language	English
Pages (from-to)	197-218
Number of pages	22
Journal	Journal of Financial Economics
Volume	116
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2015.01.002
State	Published - Apr 1 2015

Bibliographical note

Publisher Copyright:
© 2015 Elsevier B.V.

Keywords

Discretionary liquidity
Hedge funds
Liquidity

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2015.01.002

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abstract = "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.",

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AB - 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.

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Hedge funds and discretionary liquidity restrictions

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

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