Hedge funds and discretionary liquidity restrictions

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 withd...

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Bibliographic Details
Published in:Journal of financial economics 2015-04, Vol.116 (1), p.197-218
Main Authors: Aiken, Adam L., Clifford, Christopher P., Ellis, Jesse A.
Format: Article
Language:English
Subjects:
Conflicts of interest
Discretionary liquidity
Economic analysis
Economic conditions
Economic crisis
Economic forecasts
Financial crisis
Hedge funds
Investment funds
Liquidity
Restrictions
Studies
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2015.01.002