Professor Jarjisu Sa-Aadu, Professor of Finance at the Henry B. Tippie College of Business of the University of Iowa, United States of America, on Wednesday, February 25, 2015, presented a paper on ‘Market Liquidity, Funding Liquidity, and Hedge Fund Performance’ on the occasion of University of Ghana Business School’s (UGBS) Seminar Series programme.
Presenting the Paper co-written by Mahmut Llerisoy and Ashish Tiwari, both of the Tippie College of Business, Prof. Sa-Aadu expounded on hedge funds and how their performance influence market liquidity.
He said hedge funds are investment companies that seek to exploit such phenomena as temporary mispricing in the value of securities. Their returns, he continued, are almost entirely a function of the hedge fund manager’s ability to identify and capture transitory trading opportunities.
Hedge funds, he stressed, aside from being major players in international markets, are an important investor group in terms of capital and number, as well as providing the primary source of investment capital, exponentially more than multinationals provide.
Prof. Sa-Aadu pointed out, however, that hedge funds are affected by market liquidity risk, which he explained as excessive borrowing to fund portfolio holdings which are illiquid in nature. He considered this a risk because of the essence of liquidity in enabling financial markets to function properly, thus playing a critical role in market downturns/crises.
The lack of liquidity, he divulged, led to such financial crises as the Russian debt crisis in 1998, BNP Paribas Hedge Fund Lockout in 2007, and 2008’s global financial meltdown, amongst others.
His research, which tested a number of hypotheses using a sample size of almost six thousand funds, unearthed a number of provoking findings.
These included the revelation that the worst performing hedge funds are those with the highest exposure to funding liquidity and the lowest exposure to market liquidity.
He also discovered that hedge funds tend to stay longer in high liquidity regimes and outperform those in lower ones since hedge funds tend to perform badly in low liquidity regimes.
Prof. Sa-Aadu then called for a capable body to constantly monitor the activities of hedge fund managers to ensure they make informed decisions which will not be detrimental to global financial fortunes.
Also present at the seminar were the Dean of UGBS, Prof. Joshua Yindenaba Abor, who also doubles as Chair of the Seminar Series, and Dr. Kwesi Dartey-Baah, Coordinator of UGBS’s Seminar Series
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