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Article

Investor Behavior, Reporting Intervals, and Hedge
Fund Stability

Andrew Kumiega, Thaddeus Neururer and Ben Van Vliet
The Journal of Investing Summer 2012, 21 (2) 40-48; DOI: https://doi.org/10.3905/joi.2012.21.2.040
Andrew Kumiega
is a quality manager at Infinium Capital Management and adjunct faculty in the Stuart School of Business at Illinois Institute of Technology in Chicago, IL.
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  • For correspondence: akumiega@iit.edu
Thaddeus Neururer
is a senior risk manager at Infinium Capital Management in Chicago, IL.
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  • For correspondence: thaddeus.neururer@infiniumcm.com
Ben Van Vliet
is a lecturer and associate director in the Stuart School of Business at Illinois Institute of Technology in Chicago, IL.
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  • For correspondence: bvanvliet@stuart.iit.edu
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Abstract

In the 2000s, large hedge funds became major investors in illiquid assets. When returns were steady, inflows and outflows of capital balanced each other out. But in 2008 and 2009, investors removed capital at rapid rates despite depressed prices. In this article, the authors develop a Bayesian model where investors learn about a hedge fund’s returns and variance in discrete time. The model admits a dynamic where market-to-market losses created in illiquid markets can lead to additional redemption requests. The authors show by simulation that the probability of this cycle occurring and leading to a fund failure is positively related to the reporting interval of a fund’s performance to investors. As hedge funds have moved steadily toward reporting on a higher frequency, it is not surprising that many have enacted their gate provisions.

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The Journal of Investing: 21 (2)
The Journal of Investing
Vol. 21, Issue 2
Summer 2012
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Investor Behavior, Reporting Intervals, and Hedge
Fund Stability
Andrew Kumiega, Thaddeus Neururer, Ben Van Vliet
The Journal of Investing May 2012, 21 (2) 40-48; DOI: 10.3905/joi.2012.21.2.040

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Investor Behavior, Reporting Intervals, and Hedge
Fund Stability
Andrew Kumiega, Thaddeus Neururer, Ben Van Vliet
The Journal of Investing May 2012, 21 (2) 40-48; DOI: 10.3905/joi.2012.21.2.040
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