Academic Research Shows the Power Hedge Funds Wield on Market

While smaller in size relative to their institutional counterparts with global influence, hedge funds wield a considerable amount of power in the capital markets, particularly with regard to equity prices.

“Hedge funds exert far more power on equity prices than most other classes of investors, according to a recent paper, while the passive cohort are among the least influential,” a Financial Planning article noted. “Ralph Koijen at the University of Chicago, Robert Richmond at New York University and Motohiro Yogo at Princeton University used a decade of data across the U.S., U.K., euro area and Japan.”

The results of the study showed that “fast money has more than three times the impact on equity valuations, per dollar under management than long-term investors like pension funds. The insights provide ammo for stock allocators who front-run the buying and selling activity of their influential peers, in a world that can famously punish those trading on the basis of fundamentals.”

“The influence of hedge funds is remarkable given their relatively small size,” the authors wrote. Smaller investment advisors had the second-greatest impact on price, and proved even more influential across a host of other characteristics, Koijen et al found.

“Small, active investment advisors are most important for the pricing of payout policy, cash flows, and the fraction of sales sold abroad,” they said.


^WFHFMH data by YCharts

Investors looking to tail hedge fund activity can look at funds like the Goldman Sachs Hedge Industry VIP ETF (GVIP). GVIP seeks to provide investment results that closely correspond to the performance of the Goldman Sachs Hedge Fund VIP Index, which is designed to deliver exposure to equity securities whose performance is expected to influence the long portfolios of hedge funds.

GVIP gives investors:

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  • Market resources and data from Goldman Sachs: GVIP capitalizes on the extensive resources of a leading global investment firm and pioneer in the analysis of investing trends in the hedge fund universe to offer investors access to an advanced investment solution through a low-cost ETF.

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