Markus K. Brunnermeier


 Hedge Funds and the Technology Bubble
Co-author: Stefan Nagel (Stanford University)
Reference: Journal of Finance, (2004), 59(5), 2013-2040.
Abstract: This article documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their positions in stocks that were about to decline, avoided much of the downturn. Our findings question the efficient markets notion that rational speculators always stabilize prices. They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage.
Keywords: Hedge Funds, Bubbles, Limits to Arbitrage, Synchronization, Market Timing,  Behavioral Finance
Presentation  Slides: PDFPowerpoint
Extra Information: Winner of Smith Breeden Prize for the best article published in the Journal of Finance 2004 (First Prize).
Media Mention: Bloomberg Dec., 1st, 2004.