Hedge Fund Equity Ownership and Trading and Its Predictive Power Toward Equity Market

This article analyzes the determinants of hedge funds’ equity ownership and trading during 2000 - 2018, and their predictive power for future equity market. Their equity ownership and size experienced a huge increase during pre-financial crisis, had a dramatic drop during crisis period, and remain stable afterwards. During financial crisis, hedge funds hold older stocks with low volatility, but during post-crisis periods, they hold younger stocks with higher volatility. Hedge fund equity ownership predicts positive long-term future equity returns during both precrisis and crisis period, and its trading predicts positive short-term returns followed by a reversal pattern during the post-crisis period. In addition, hedge funds with different characteristics contain different predictive powers. Young hedge funds have better predictive power than old hedge funds. Large hedge funds have better predictive power than small hedge funds. Hedge funds with high flow have a clearer predictive pattern than hedge funds with low flow.