Do Hedge Funds Profit from Mutual-Fund Distress?
NBER Working Paper No. w13786
49 Pages Posted: 8 Feb 2008 Last revised: 3 Sep 2022
See all articles by Joseph Chen
Joseph Chen
University of California, Davis - Graduate School of Management
Samuel Gregory Hanson
Harvard University - Business School (HBS)
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Date Written: February 2008
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.
Chen, Joseph S. and Hanson, Samuel Gregory and Hong, Harrison G. and Stein, Jeremy C., Do Hedge Funds Profit from Mutual-Fund Distress? (February 2008). NBER Working Paper No. w13786, Available at SSRN: https://ssrn.com/abstract=1091421
Joseph S. Chen
University of California, Davis - Graduate School of Management ( email )
Davis, CA 95616
Harvard University - Business School (HBS) ( email )
Soldiers Field Road
Morgan 270C
Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )
National Bureau of Economic Research (NBER)
Jeremy C. Stein (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html