Do Hedge Funds Profit From Mutual-Fund Distress? / Joseph Chen, Samuel Hanson, Harrison Hong, Jeremy C. Stein.

Format:

Book

Author/Creator:

Chen, Joseph.

Contributor:

National Bureau of Economic Research.

Hanson, Samuel.

Hong, Harrison.

Stein, Jeremy C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13786.

NBER working paper series no. w13786

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

This paper explores the question of whether hedge funds engage in front-running strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds -- those suffering large outflows of assets under management -- are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individual stock level, short interest rises in advance of sales by distressed mutual funds.

Notes:

Print version record

February 2008.