The Liquidity Risk of Liquid Hedge Funds *

  title={The Liquidity Risk of Liquid Hedge Funds *},
  author={Melvyn Teo},
This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79 percent per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the TED spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping… CONTINUE READING
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