Abstract
This paper documents that hedge funds specializing in Sub-prime mortgages did not take advantage of the housing bubble and they did not trade against it. Hedge fund capitalization is an important factor regarding how funds suffered during the crisis. Small funds suffered the most. Mid and small cap portfolios took into account housing prices while fund managers of large portfolios used mainly subprime loan foreclosures. Also, mid cap portfolio primarily relied on macroeconomic indicators (mortgage ARM rates, housing prices, subprime foreclosures) and, as a result, suffered less compared to their peers above. Duration and quality of the credit instruments are significant factors in explaining hedge funds returns. Naturally, our study, in line with the existing literature during turbulent periods, documents that the lack of liquidity was a key driver of performance.
Published Version
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