Hedge funds: Statistical arbitrage, high frequency trading and their consequences for the environment of businesses

Abstract

Purpose

The paper's aim is to explore the impact of statistical arbitrage and high-frequency trading as hedge fund investment strategies that have a significant impact on the environment of corporations.

Design/methodology/approach

The paper is a meta-analysis of the role of investment strategies within complex systems.

Findings

The growth of hedge fund investment activity based on statistical arbitrage tends to produce a vulnerability; more funds using the strategy helps to create the profitable outcomes that the strategy relies upon. However, the growth also reduces the time lines of profitability and produces an underlying instability based on overlapping holdings and the use of leverage. The shortened timelines also create a further impetus towards technological competition and promotes high frequency trading, which then introduces further vulnerabilities based on “stop-loss cascades”.

Research limitations/implications

Much of the trading creates a superficial form of liquidity, which gives a limited sense of market vulnerabilities. The basis of complex interactions between high frequency traders is also not clearly understood. Researchers and agents of policy ought to pay greater attention to the issues than is currently the case.

Originality/value

The area is one that is under-researched.

Citation

Morgan, J. (2013), "Hedge funds: Statistical arbitrage, high frequency trading and their consequences for the environment of businesses", Critical Perspectives on International Business, Vol. 9 No. 4, pp. 377-397. https://doi.org/10.1108/cpoib-06-2013-0020