Ž . Journal of Empirical Finance 7 2000 1–36 www.elsevier.comrlocatereconbase Measuring the market impact of hedge funds q William Fung a , David A. Hsieh b, ) a Paradigm Financial Products International, LLC, DE, USA b Fuqua School of Business, Duke UniÕersity, Box 90120, Durham, NC 27708-0120, USA Abstract Hedge funds often employ opportunistic trading strategies on a leveraged basis. It is natural to find their footprints in most major market events. A ‘‘small bet’’ by large hedge funds can be a sizeable transaction that can impact a market. This study estimates hedge fund exposures during a number of major market events. In some episodes, hedge funds had significant exposures and were in a position to exert substantial market impact. In other episodes, hedge fund exposures were insignificant, either in absolute terms or relative to other market participants. In all cases, we found no evidence of hedge funds using positive feedback trading strategies. There was also little evidence that hedge funds systematically caused market prices to deviate from economic fundamentals. q 2000 Elsevier Science B.V. All rights reserved. JEL classification: G10; G15; G18 Keywords: Hedge funds; Market impact; Leverage; Feedback trading strategies 1. Introduction The last decade witnessed a growing interest in hedge funds from investors, academics, and regulators. Catering to the needs of wealthy individuals and institutional investors, hedge funds are typically organized as private vehicles q This work was started while David Hsieh was a visiting scholar at the International Monetary Fund. ) Corresponding author. Tel.: q 1-919-660-7779; fax: q 1-919-681-7961; home page: http:rr faculty.fuqua.duke.edur ;dah7rindex.htm. Ž . E-mail address: dah7@mail.duke.edu D.A. Hsieh . 0927-5398r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved. Ž . PII: S0927-5398 00 00005-0