Do Hedge Funds Dynamically Manage Systematic Risk?
University of California, Berkeley - Haas School of Business
University of Waterloo
University of Missouri, Columbia
P. Raghavendra Rau
University of Cambridge; UC Berkeley - Haas School of Business
September 16, 2013
Hedge fund managers preferentially seek to maintain low systematic risk across market states, forgoing potential market timing opportunities, but do increase systematic risk in response to increasing correlation risk. Better educated and more experienced managers have greater skill in managing low systematic risk and this ability is more pronounced during down markets. Investors recognize skill in managing systematic and correlation risk and reward funds with persistently low risks with incremental flows. Funds appear to preferentially time fee increases to coincide with decreases in systematic and correlation risk. These higher costs are offset for investors by the superior performance of the funds.
Number of Pages in PDF File: 63
Keywords: Hedge Funds, Alternative Investments, Career Concerns, Correlation Risk, Systematic Risk
JEL Classification: G11, G14, G23, G32working papers series
Date posted: October 30, 2012 ; Last revised: September 17, 2013
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