Abstract
In this paper, we study the macro behavior of investor flows in the hedge fund industry. By examining hedge fund flows grouped by investment strategies and geographical portfolio holdings, we focus on the relation between hedge fund flows and financial crises. We find a strong flow substitution effect across the different investment strategies: on average, a strategy experiences a 6.31% decrease in flows for each 1% increase in flows to all other strategies. This finding indicates that hedge funds do not contribute to financial contagion in volatility across styles, and may actually contribute to negative correlations in across-style returns. However, while we find a strong substitution effect between developed and emerging markets, we also find a weak complementary flow effect among emerging markets, which may indicate that hedge funds contribute to contagion during financial crises in emerging markets. Overall, our paper provides new evidence on how aggregate hedge fund flows impact financial markets.
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