2134/10292036.v1
Chenlu Li
Chenlu
Li
Baibing Li
Baibing
Li
Kai-Hong Tee
Kai-Hong
Tee
Are hedge funds active market liquidity timers?
Loughborough University
2019
Finance
Banking, Finance and Investment
Accounting, Auditing and Accountability
Foreign exchange market
Hedge fund
Liquidity
Markov regime switching
Timing behaviour
Law
2019-11-14 10:55:31
Journal contribution
https://repository.lboro.ac.uk/articles/journal_contribution/Are_hedge_funds_active_market_liquidity_timers_/10292036
<p>This
paper investigates liquidity timing behaviour of hedge funds that invest
globally in foreign investment assets. We expect these hedge funds to manage
currencies exposure differently, depending on the extent they treat them as an asset
class. In this paper, we investigate if actively timing foreign exchange (FX)
liquidity adds value to hedge funds’ investments. Unlike the existing studies <a>where fund managers are assumed to either time or not time
the market over the entire study period, we argue that fund managers may
strategically choose to be active market liquidity timers based on the market
condition at the time.</a> To test this hypothesis, we develop a
state-dependent liquidity timing model embedded with a Markov regime switching
process and identify changes in the FX liquidity timing behaviour among the Global
Derivatives hedge funds over an eighteen-year period. Our findings reveal that such
regime changes in timing behaviour are driven by the underlying FX liquidity
condition. A further analysis to compare the changes in the timing behaviour
over time shows that hedge funds that are active market liquidity timers outperform
those that engage in liquidity timing less frequently in all strategies
categories. </p><br>