Discussion Paper

No. 2019-31 | April 30, 2019
Market runs of hedge funds during financial crises


A hedge fund’s capital structure is fragile because uninformed fund investors are highly loss sensitive and easily withdraw capital in response to bad news. Hedge fund managers, sharing common investors and interacting with each other through market price, sensitively react to other funds’ investment decisions. In this environment, panic-based market runs can arise not because of systematic risk but because of the fear of runs. The authors find that when the market regime changes from a normal state to a “bad” state (in which runs are possible), hedge funds reduce investment prior to runs. In addition, the market runs are more likely to occur in a market where hedge funds hold greater market exposure and uninformed traders have greater sensitivity to past price movement.

JEL Classification:

G01, G23


  • Downloads: 76


Cite As

Sangwook Sung, Hoon Cho, and Doojin Ryu (2019). Market runs of hedge funds during financial crises. Economics Discussion Papers, No 2019-31, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-31

Comments and Questions

Anonymous - Finance
May 03, 2019 - 05:33

This study theoretically shows that the irrational behavior of uninformed investors indeed hinder the investment decision of hedge fund in equilibrium. This study is meaningful for many researchers and practitioners in the sense that the problem may distort the investment decision. Based on this study, many follow-up studies can analyze ...[more]

... features of uninformed investors and their impact on the hedge fund.