EXPLOITING INEFFICIENCIES: HEDGE FUND STRATEGIES AND THE EVOLUTION OF MARKET EFFICIENCY
EXPLOITING INEFFICIENCIES: HEDGE FUND STRATEGIES AND THE EVOLUTION OF MARKET EFFICIENCY

Author(s): Jana Stockbauer
Subject(s): Politics / Political Sciences, Social Sciences
Published by: Editura Universităţii »Alexandru Ioan Cuza« din Iaşi
Keywords: hedge funds; financial stability; systematic risk; Efficient Market Hypothesis;
Summary/Abstract: The paper examines how hedge fund strategies exploit persistent market inefficiencies and evaluates the implications for the Efficient Market Hypothesis in both global and European financial markets. While the EMH traditionally asserts that asset prices fully reflect available information, empirical evidence increasingly shows that certain hedge funds consistently achieve abnormal returns, particularly during periods of market stress and dislocation. Using a cross-strategy perspective, spanning long/short equity, relative value, global macro, and event-driven funds, this study investigates how hedge funds identify and arbitrage pricing anomalies arising from behavioral biases, liquidity constraints, and institutional frictions. Building on theoretical foundations in behavioral finance and the Adaptive Markets Hypothesis, the paper conducts a comparative analysis of hedge fund performance across multiple crisis periods, including the 2008 Global Financial Crisis, the 2011 Eurozone debt crisis, and the COVID-19 shock. Emphasis is placed on the structural characteristics of European markets, such as regulatory asymmetries, capital mobility, and the heterogeneity of investor behavior across EU member states. The results indicate that hedge funds demonstrate enhanced resilience and alpha generation precisely when markets deviate from informational efficiency, particularly in less liquid or segmented environments. These findings suggest that financial markets exhibit dynamic, context-dependent inefficiencies, which challenge the applicability of the Efficient Market Hypothesis in its stronger forms. Hedge funds, rather than being anomalies, may function as essential agents of price discovery in imperfect markets. The study contributes to ongoing debates about market efficiency, alternative asset management, and the evolving role of hedge funds within the European financial architecture.

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