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http://ssrn.com/abstract=1130742
 
 

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Crises and Hedge Fund Risk


Monica Billio


Ca Foscari University of Venice - Department of Economics

Mila Getmansky Sherman


University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Loriana Pelizzon


Ca Foscari University of Venice - Department of Economics

July 18, 2010

UMASS-Amherst Working Paper
Yale ICF Working Paper No. 07-14
University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 10-08

Abstract:     
We study the effect of financial crises on hedge fund risk. Using a regime-switching beta model, we separate systematic and idiosyncratic components of hedge fund exposure. The systematic exposure to various risk factors is conditional on market volatility conditions. We find that in the high-volatility regime (when the market is rolling-down and is likely to be in a crisis state) most strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit a high volatility regime of the idiosyncratic risk, which could be attributed to contagion among hedge fund strategies. In our sample this event happened only during the Long-Term Capital Management (LTCM) crisis of 1998. Other crises including the recent subprime mortgage crisis affected hedge funds only through systematic risk factors, and did not cause contagion among hedge funds.

Number of Pages in PDF File: 61

Keywords: Hedge Fund, Risk Management, Financial Crisis

JEL Classification: G12, G29, C51

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Date posted: May 20, 2008 ; Last revised: April 25, 2012

Suggested Citation

Billio, Monica and Sherman, Mila Getmansky and Pelizzon, Loriana, Crises and Hedge Fund Risk (July 18, 2010). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 10-08; UMASS-Amherst Working Paper; Yale ICF Working Paper No. 07-14; University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 10-08. Available at SSRN: http://ssrn.com/abstract=1130742 or http://dx.doi.org/10.2139/ssrn.1130742

Contact Information

Monica Billio (Contact Author)
Ca Foscari University of Venice - Department of Economics ( email )
Cannaregio 873
Venice, 30121
Italy
HOME PAGE: http://venus.unive.it/billio
Mila Getmansky Sherman
University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )
Amherst, MA 01003-4910
United States
Loriana Pelizzon
Ca Foscari University of Venice - Department of Economics ( email )
Cannaregio 873
Venice, 30121
Italy
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