The Liquidity Deception How hedge fund liquidity has plummeted under the industry's most watchful eyes.

Today, few investors realize that, by some measures, liquidity in the equity markets is below pre-Lehman default levels. For active managers, the moderate decline in trading volumes at the exchanges masks an even greater concern. Liquidity, for active managers in particular, has receded to record lows, and is set to decline even further. The problem is that traditional liquidity measures don’t take the herding behavior of active managers into account.

Crowdedness and crowd selling is now a real risk to investors, and liquidity, or lack of such, is a primary ingredient in this risk factor. This study unpacks trends in liquidity that every money manager should understand—ignoring them could be a costly mistake.

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