Hedge fund market timing skills, liquidity, flows and performance

The doctoral dissertation consists of three essays on the topics of hedge fund capital flows, liquidity and market timing skills.;In the first essay, using SEC registered portfolio level data, we track each hedge fund capital outflows drawn by fund of hedge funds, and examine the return-flow and liquidity-flow relationship. We find that while the redemption probability of hedge funds is negatively correlated with its past performance for most of the cases, the flow's return sensitivity is significantly affected by the liquidity level provided by the individual hedge fund. Hedge funds providing lower liquidity to investors can effectively reduce their probability of being redeemed by a FoF. We further find that when the market funding liquidity is low, hedge fund redemption probability is also low. Our conclusion shows that older funds are less likely to be redeemed, and that both the number of hedge funds in the portfolio and their relative performance within the portfolio significantly affect the redemption/capital outflow decision.;The next two essays contribute to the literature on hedge fund managers' market timing skills. Firstly we use a unique semi-parametric panel data model capable of providing consistent short period estimates of the return correlations with three market factors for a sample of Long/Short equity hedge funds. We find evidence of significant market timing ability by fund managers around the recent three market crisis periods. Later we study the behavior of individual fund managers over time, and we show that at the 10% significance level, over 22% of hedge funds possess good nonlinear market timing skills. In addition, we find that most hedge funds engage in nonlinear market timing instead of the standard linear market timing examined earlier in the literature. Further, we find asymmetry in market timing strategies between good and bad markets. A significant number of managers are found to behave more conservatively when the market return is expected to be extremely good. Moreover, we find that successful market timers have better risk-adjusted performance and also are likely to possess good stock selection skills. Successful market timers on average have longer lives and are relatively larger in size.