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The Journal of Alternative Investments

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Article

Liquidity Risk and Economies of Scale in Funds
of Hedge Funds

Hany A. Shawky and Ying Wang
The Journal of Alternative Investments Fall 2014, 17 (2) 51-67; DOI: https://doi.org/10.3905/jai.2014.17.2.051
Hany A. Shawky
is a professor of finance at the Center for Institutional Investment Management (CIIM) and School of Business in the University at Albany (SUNY) in Albany, NY.
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  • For correspondence: h.shawky@albany.edu
Ying Wang
is an assistant professor of finance at the Center for Institutional Investment Management (CIIM) and School of Business in the University at Albany (SUNY) in Albany, NY.
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  • For correspondence: ywang@albany.edu
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Abstract

Using data from the Lipper/TASS hedge fund database over the period 1994–2011, the authors examine the effect of liquidity risk on the relationship between size and performance for funds of hedge funds (FOFs). After confirming a significant positive size effect for FOFs, they explicitly introduce liquidity risk and find that this scale effect becomes more pronounced among FOFs with lower liquidity risk. To the extent that more illiquid FOFs exhibit higher liquidity risk, the results provide evidence in support of the liquidity hypothesis that size does not erode, but instead helps improve, performance, since FOFs do not directly manage portfolios of securities and thus are less affected by the liquidity costs associated with trading a large portfolio.

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The Journal of Alternative Investments: 17 (2)
The Journal of Alternative Investments
Vol. 17, Issue 2
Fall 2014
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Liquidity Risk and Economies of Scale in Funds
of Hedge Funds
Hany A. Shawky, Ying Wang
The Journal of Alternative Investments Sep 2014, 17 (2) 51-67; DOI: 10.3905/jai.2014.17.2.051

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Liquidity Risk and Economies of Scale in Funds
of Hedge Funds
Hany A. Shawky, Ying Wang
The Journal of Alternative Investments Sep 2014, 17 (2) 51-67; DOI: 10.3905/jai.2014.17.2.051
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  • Article
    • Abstract
    • DATA AND MEASURES
    • EMPIRICAL ANALYSIS
    • PRIMARY ANALYSIS: THE EFFECT OF LIQUIDITY RISK ON ECONOMIES OF SCALE IN FOFS
    • ECONOMIC INTERPRETATIONS AND FURTHER TESTS
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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