Abstract
Using Form PF filings over 2013–2017, we find that funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets, have shorter-term commitments from investors and creditors, and when market volatility is greater. We also find that funds with low abnormal buffers – that is, with liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks, especially around earnings announcements. Our results highlight potential trade-offs between systemic risk-oriented policies requiring larger liquidity buffers and the impairment of regular price discovery in financial markets.
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