White paper calculates the value of liquidity from a fund manager’s perspective
| Jul 5th, 2010 | Filed under: Academic Research, Hedge Fund Operations and Risk Management, Today's Post | By: Alpha Male |
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Last week, we told you about an academic study that showed hedge funds weren’t just net providers of market liquidity, but that some strategies (e.g. emerging markets) demanded more liquidity that they provided to markets. For these funds (which, according to the study, exist in various degrees across all strategies) the “illiquidity premium” may be a critical source of returns. In fact, hedge fund skeptics often say these kinds of funds are “short volatility” since they profit consistently when volatility is low, but have to pay the piper when volatility spikes – and liquidity dries up.
Much of the discussion about this “illiquidity premium” has focused on the amount of returns that must be ascribed to it – and therefore not to manager skill (see previous posts: “Is the vaunted “illiquidity premium” partially an illusion?“, “…3.96% per annum“, “Study finds many hedge funds simply hold back liquidity to power returns“, “Apples to Apples: the case for liquidity adjustments to hedge fund of funds returns“, “Research puts price on hedge fund illiquidity premium”, “Liquidity Insurance”, & “Liquidity Alpha”)
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Contributing to the debate:
We’ve looked into empirical illiquidity premium measurements to estimate the secondary exchange prices of shares of hedge funds:
http://www.tsaf-paris.com/PDF/TSAF_Hedge_Fund_Secondary_Market_Fair_Value_May10.pdf