The Secondary Market for Hedge Funds and the Closed Hedge Fund Premium



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    • Said Business School, Oxford-Man Institute for Quantitative Finance, and Center for Economic Policy Research. The author thanks the Oxford-Man Institute for Quantitative Finance and the BNP Paribas Hedge Fund Centre at LBS for financial support; Prilla Chandra, Vesa-Heikki Soini, Esteban Ortiz-Ospina, Edmund Miao, and Sushant Vale for able and dedicated research assistance; Andrew Ang, John Campbell, Mike Chernov, Terrence Hendershott, Ravi Jagannathan, Brandon Julio, Bing Liang, Narayan Naik, Andrew Patton, Ludovic Phalippou, Ronnie Sadka, Neil Shephard, Kevin Sheppard, Charles Trzcinka, Russ Wermers, Joshua White, Mungo Wilson, and Jeff Wurgler for useful discussions; and Campbell Harvey (the editor), two anonymous referees, an anonymous associate editor, and seminar participants at the Western Finance Association, Saïd Business School, the Oxford-Man Institute, London Business School, Imperial College, Darden, and UNC Chapel Hill for comments. A very special thanks to Jared Herman, Elias Tueta, and Hedgebay Trading Corporation for the data and for many useful conversations.


Rational theories of the closed-end fund premium puzzle highlight fund share and asset illiquidity, managerial ability, and fees as important determinants of the premium. Several of these attributes are difficult to measure for mutual funds, and easier to measure for hedge funds. This paper employs new data from a secondary market for hedge funds, discovers a closed-hedge fund premium that is highly correlated with the closed-end mutual fund premium, and shows that the closed-hedge fund premium is well explained by variables suggested by rational theories. Sentiment-based explanations do not find support in the data.