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Myth #4: Hedge Funds Increase

Market Volatility

For hedge funds to increase volatility, their trading behavior would have to accentuate market swings through
positive-feedback trading behavior. That is, they would have to sell when prices are falling and buy when prices are rising. So far, studies have found no evidence of positive-feedback trading by hedge funds. In fact, they suggest that hedge funds engage in negative-feedback trading. That is, they tend to sell or take a short position when prices are rising
and buy when prices are falling. By providing ready counterparties to trades, hedge funds increase the liquidity of
markets and reduce price pressures in a falling or rising market. By doing so, the funds’ trading behavior tends to reduce, not increase, the volatility of prices.10
- posted by Mark Pane @ 10:52 AM