Too Big to Ignore? Hedge Fund Flow and Bond Yields

Abstract

This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9,725 hedge funds from a combined data set of five hedge fund databases from 1994 to 2012, we find that dollar outflows have greater predictive power than inflows, and flows related to the largest 25% of hedge funds are more informative than flows of smaller funds. Dollar outflow from big funds predicts increases in both government and corporate bond yields, after controlling for other determinants of yield changes, suggesting that funds liquidate bonds in their portfolios to meet liquidity needs. After 2003, the strongest predictive power is associated with funds that impose short notice period prior to redemption, which is consistent with a fire sale hypothesis.