Hedge Fund Stock Trading in the Financial Crisis of 2007-2009
WRDS Publication in the Review of Financial Studies
Rabih Moussawi, Research Director at WRDS, has recently published a paper as lead article in the Review of Financial Studies. His article, “Hedge Fund Stock Trading in the Financial Crisis of 2007-2009,” is coauthored with Itzhak Ben-David from Ohio State University, and Francesco Franzoni from University of Lugano and Swiss Finance Institute. In their paper, they document that hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008:Q3-Q4, hedge funds sold about 29% of their aggregate portfolio. Redemptions and margin calls were the primary drivers of selloffs. Consistent with forced deleveraging, the selloffs took place in volatile and liquid stocks. In comparison, redemptions and stock sales for mutual funds were not as severe. We show that hedge fund investors withdraw capital three times as intensely as mutual fund investors do in response to poor returns. We relate this stronger sensitivity to losses to share liquidity restrictions and institutional ownership in hedge funds.
Some of the empirical methodologies used in the paper are available as part of WRDS Research Applications and WRDS SAS Macros product, and some of the results can be accessed and replicated using WRDS in the following page: http://wrds-web.wharton.upenn.edu/wrds/research/
Ben-David, Itzhak, Francesco Franzoni, and Rabih Moussawi, 2012, “Hedge Fund Stock Trading in the Financial Crisis of 2007–2009,” The Review of Financial Studies, January 2012, Issue 25, No. 1, pp 1-54.