On the High-Frequency Dynamics of Hedge Fund Risk Exposures
Andrew J. Patton
Duke University - Department of Economics; University of Oxford - Oxford-Man Institute of Quantitative Finance
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR)
December 14, 2011
We propose a new method to model hedge fund risk exposures using relatively high frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than changes in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.
Number of Pages in PDF File: 62
Keywords: beta, time-varying risk, performance evaluation, window-dressing, hedge funds, mutual funds
JEL Classification: G23, G11, C22working papers series
Date posted: June 29, 2011 ; Last revised: December 15, 2011
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