By analyzing capital flows in and out of the hedge fund industry from 1994 to 2010,we find evidence that hedge fund’s flows can predict credit spread, defined as the difference between Moody’s Baa yield and ten-year Treasury bond yield. Outflows from debt-oriented funds and funds with positive exposure to credit risk lead to increase in credit spread, while outflows from equity oriented funds and funds with negative exposure to credit risk lead to decrease in credit spread. Inflows to larger funds increase credit spread, and their outflows decrease credit spread. These results suggest that debt-oriented funds hold large positions in corporate bonds and must liquidate them when facing liquidity constraint. Equity and bigger size funds have larger positions in liquid high grade bonds and use these to manage their liquidity requirements instead. Hedge fund flows explain up to 42% of the variation in credit spread compared to a baseline level regression of 15%. The fund strategy is the most important determinant.
|Number of pages||30|
|Publication status||Published - 2013|
- hedge fund, hedge fund flow, credit spread, systemic risk