Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data

Abstract We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity fundamental investors. find that exhibit skill in opening positions, but they close their positions too early, thereby forgoing about one-third trades’ potential profitability. explain this behavior with limits arbitrage: early order reallocate capital more profitable investments and/or accommodate tightened financial constraints. Consistent view, we document leave money on table after new negative returns, or increases funding constraints volatility. (JEL G11, G12, G14, G15)