Hedge funds may reduce liquidity in volatile periods – BoC research
By transacting abnormally in times of market stress, hedge funds can reduce liquidity
Hedge funds can amplify market stress in turbulent times, researchers with the Bank of Canada find in a new research note.
“Hedge funds can at times amplify declines in market liquidity,” say Jabir Sandhu and Rishi Vala. Such funds normally trade in the opposite direction to other market participants, helping to act as a counterbalance.
But the authors found hedge funds began to sell bonds during the market turmoil of March 2020, just as other investors did the same. Instead of providing
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