Locked Up by a Lockup: Valuing Liquidity as a Real Option

Ang, Andrew; Bollen, Nicolas P. B.

doi:10.2139/ssrn.1356705

Cited by 18 publications

(17 citation statements)

References 56 publications

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“…In 2011, there were no new issues of ARS. Other intermediated fund vehicles also became more illiquid during this time: hedge funds, for example, imposed 'gates' provisions that did not allow for investors to withdraw capital (see Ang and Bollen, 2010).…”

Section: The Baseline Modelmentioning

confidence: 99%

Portfolio Choice with Illiquid Assets

2014

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W e present a model of optimal allocation to liquid and illiquid assets, where illiquidity risk results from the restriction that an asset cannot be traded for intervals of uncertain duration. Illiquidity risk leads to increased and state-dependent risk aversion and reduces the allocation to both liquid and illiquid risky assets. Uncertainty about the length of the illiquidity interval, as opposed to a deterministic nontrading interval, is a primary determinant of the cost of illiquidity. We allow market liquidity to vary from "normal" periods, when all assets are fully liquid, to "illiquidity crises," when some assets can only be traded infrequently. The possibility of a liquidity crisis leads to limited arbitrage in normal times. Investors are willing to forgo 2% of their wealth to hedge against illiquidity crises occurring once every 10 years.

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Section: The Baseline Modelmentioning

confidence: 99%

Portfolio Choice with Illiquid Assets

2014

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“…For this reason we break down leverage statistics by hedge fund sectors. 8 In many cases, hedge funds have the ability to restrict outflows by invoking gates even after lockup periods have expired (see, for example, Ang and Bollen, 2010 Thus, an important caveat with our analysis is that leverage is not measured in a consistent fashion across hedge funds and the hedge funds in our sample use different definitions of leverage. Our data is also self-reported by hedge funds.…”

Section: Reported Hedge Fund Leveragementioning

confidence: 99%

“…between past flows and leverage may be due to notice period, lockups, and gates restrictions (see, for example, Ang and Bollen, 2010), which give managers advance notice of flows before they actually occur. Table 7 shows two major differences in sign between the predictive model coefficients and the contemporaneous determinants of leverage in the macro-only specification.…”

Section: Contemporaneous Relations With Hedge Fund Leveragementioning

confidence: 99%

Hedge Fund Leverage

Ang

Gorovyy

Inwegen

2011

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We investigate the leverage of hedge funds in the time series and cross section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economywide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.

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“…In the hedge fund industry, investors often accept constraints on withdrawals. For instance, hedge funds may have lockup periods of typically one year during which investors cannot recover their funds (Agarwal, Daniel, and Naik, 2009;Ang and Bollen, 2010). Once they are able to do so, investors Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/jfec must give the fund advance notice (e.g., one month) and then only redeem at fixed dates (e.g., every quarter).…”

Section: Introductionmentioning

confidence: 99%