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Three Studies on Hedge Fund Risk Taking and Herding

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Thesis type
(Thesis) Ph.D.
Date created
This dissertation consists of three studies on hedge fund risk taking and herding. The first paper documents the risk taking of hedge funds in the last three years prior to liquidation using the measures of return volatility. I find that the risk reduction is the greatest for the liquidated sample during the last two and three years as the fund performance drops. Moreover, the volatility-hazard regression shows that the risk taking of funds reduces during the last year prior to fund liquidation as the predicted hazard rates in the previous year increase. The evidence indicates that the liquidation is forced when the performance of the portfolios drops below the liquidation barrier. The second paper investigates the risk taking choices of hedge funds following redemption requests. I find that hedge funds with longer restriction periods tend to take lower risk if there are no significant redemption requests. Second, hedge funds with short restriction periods tend to increase risks following redemption requests. The increase in risk is larger for large redemptions than for small redemptions. However, if there are large redemptions during market crisis, hedge funds tend to take higher post risk even when the restriction periods are longer. The third paper examines hedge funds herding in response to macroeconomic uncertainty during periods of high volatility with extreme market returns. I find that hedge funds that follow directional strategies herd towards the consensus during periods of high macroeconomic uncertainty. The degree of herding towards the consensus becomes greater during periods of economic downturn. I also find that the degree of herding for live funds following directional strategies is greater during periods of high macroeconomic uncertainty in down markets. This suggests that the similar trading manners of the directional fund managers in times of macroeconomic uncertainty could be beneficial for fund survival.
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This thesis may be printed or downloaded for non-commercial research and scholarly purposes.
Scholarly level
Supervisor or Senior Supervisor
Thesis advisor: Klein, Peter
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