F&A group seminar series
Speaker: Petri Jylha (Helsinki School of Economics)
Title: Do Hedge Funds Supply or Demand Immediacy?
In this paper, we study whether hedge funds supply or demand immediacy on NYSE and Amex
traded stocks. Regressing hedge funds’ returns on a measure of the returns from providing
immediacy we find that hedge funds typically supply immediacy in the stock market. Crosssectional
differences exist, however, and while equity market neutral, event driven and long/short
equity hedge funds typically supply immediacy, for instance fixed-income arbitrage funds (that
engage in capital structure arbitrage) on average demand immediacy in the stock market. Consistent
with the theories presented in Brunnermeier and Pedersen (2009) and Gromb and Vayanos (2010),
we find that the amount of speculative capital (assets under management in hedge funds and the
availability of funding liquidity to hedge funds) affects negatively the returns from providing
immediacy, and that increases in the amount of speculative capital improve market liquidity and
reduce stock return volatility. In recent years, following the introduction of the Autoquote system at
NYSE in 2003, hedge funds role as suppliers of immediacy has decreased.
Our proxy for the returns from providing immediacy is the returns to a zero-investment long-short
trading strategy that buys stocks in the quartile of stocks with the highest expected weekly excess
returns, evaluated using past estimates of short-term return reversal, and sells short stocks in the
quartile of stocks with the lowest expected excess returns.
Key words: Hedge Funds, Speculative Capital, Liquidity, Immediacy, Volatility
JEL Classifications: G12, G23