Not Just Fire Sales: Contrarian Hedge Funds Find Alpha
| Apr 16th, 2012 | Filed under: Alpha Hunters, Alpha Strategies, Hedge Fund Strategies, Today's Post | By: cfaille |
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A new academic paper tells us something about the relationship between hedge funds and mutual funds throughout the business cycle, even as it builds on earlier scholarship that focused specifically on that same relationship during times of crisis.
The authors, Massimo Massa, an associate professor of finance at INSEAD, and two others, observe that there is an existing literature on “fire sales” by mutual funds that shows that hedge funds prey on mutual funds by buying valuable assets that mutual funds are forced to sell. In such cases, hedge funds can get bargains because they can hold out, whereas mutual funds are forced to sell by redemption claims.
This body of work extends back at least to a 2007 paper by Joshua D. Coval and Erik Stafford, “Asset Fire Sales (and Purchases) in Equity Markets” in the Journal of Financial Economics. Coval and Stafford found “considerable support for the notion that widespread selling by financially distressed mutual funds leads to transaction prices that occur below fundamental value.”
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Author Bio:
Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."
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