Three Essays on Hedge Fund Trading and Stock Market

  • Xinyu Cui

Student thesis: Phd


This thesis aims to understanding the hedge fund trading behaviors, including stock picking, stock price manipulation, and their impact on stock market. It consists of three chapters, which are independent research papers. In the first chapter, we investigate who the counterparties of hedge fund equity trading are and what the economic reasons behind their trading decisions might be. We find that hedge funds earn positive ex-post abnormal returns and avoid negative abnormal returns on their equity portfolios when trading in the opposite direction of highly-diversified low-turnover institutional investors (quasi-indexers). This pattern is pronounced for short and long-term holding periods, as well as if trading is conditional on return predictability associated with well-known market anomalies. It seems to be driven by the preferences of quasi-indexers for liquid, high-market-beta stocks, which tend to exhibit low future abnormal returns. Trading against other institutional investors or non-institutions does not result in abnormal performance for hedge funds. In the second chapter, we analyze the equity trading of hedge funds facing substantial outflows. We find that hedge funds that trade against the flow display significant stock-picking skills. Stocks purchased by hedge funds facing large outflows deliver positive ex-post abnormal returns. Such “revealed under pressure” stock-picking skills are higher after 2007-2008 financial crisis and for hedge funds with larger size, more illiquid assets, or stronger incentives to perform to build up a track record. We also find that hedge funds that engage in the trading against the flow have higher chances of survival over the consequent quarter. In the third chapter, we investigate the stock manipulation of hedge funds. We follow a research paper published in The Journal of Finance (Ben-David et al., 2013) presenting empirical evidence of stock price manipulation by hedge funds between 2000 and 2010. They show that stocks held by hedge funds exhibited positive daily abnormal returns and then reversals (“blips”) at quarter end. These results are cross-sectionally robust: we replicate them using a different sample of hedge funds during the same time period. In the post-publications period from 2011 to 2018, however, we find no significant relation between hedge fund ownership and end-of-quarter stock returns, suggesting reduction in stock price manipulation by hedge funds post-publication. We is for first person and he/she is for third person throughout the thesis to indicate that three chapters are co-authored with my supervisor Olga Kolokolova (and with George Wang for the first chapter). The empirical analysis in all chapters is my own work, while we equally contributed with the co-authors to the development of the idea, discussion of methodology, and structuring of the papers.
Date of Award1 Aug 2021
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorOlga Kolokolova (Supervisor) & Alexandros Kostakis (Supervisor)


  • Institutional Trading, Alpha, Market Beta, Market Anomalies, Quasi- Indexers, Hedge Funds.
  • Flows, Trading Skills, Hedge Funds.
  • Stock Manipulation, Post-Publication, Hedge Funds.

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