Which Hedge Fund Styles Hedge Against Bad Times?
55 Pages Posted: 18 Aug 2013 Last revised: 24 Feb 2015
Date Written: February 20, 2015
Abstract
We investigate an important question for institutional investors — namely, which hedge fund investing styles help to hedge against bad times? We define good versus bad times as (1) up and down equity market regimes derived from the 200-day moving average of the S&P 500 price index or (2) nonstressed and stressed financial market regimes determined endogenously using the Federal Reserve Bank of Kansas City Financial Stress Index and threshold estimation. Our findings reveal that only a few hedge fund styles limit or alter their risk exposures to provide valuable hedges against bad times; in contrast, other styles remain substantially exposed to — or become more exposed to — particular risk factors and correspondingly suffer large losses during bad times. In the context of “balanced” 40-30-30 ortfolios that allocate across U.S. stocks, bonds, and individual hedge fund styles, we find that the Global Macro, Managed Futures, and Multi-Strategy styles provide large investors with especially valuable hedges against bad times.
Keywords: Asset-based style factors, Multifactor model, Regime switching, Financial stress,Threshold regression, Portfolio performance
JEL Classification: C24, C58, G11, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Price Drift as an Outcome of Differences in Higher Order Beliefs
By Snehal Banerjee, Ron Kaniel, ...
-
Bubbles and Panics in a Frictionless Market with Heterogeneous Expectations
By H. Henry Cao and Hui Ou-yang
-
Dynamic Trading and Asset Prices: Keynes vs. Hayek
By Giovanni Cespa and Xavier Vives
-
Dynamic Trading and Asset Prices: Keynes Vs. Hayek
By Giovanni Cespa and Xavier Vives
-
Dynamic Trading and Asset Prices: Keynes vs. Hayek
By Giovanni Cespa and Xavier Vives
-
Dynamic Trading and Asset Prices: Keynes Vs. Hayek
By Giovanni Cespa and Xavier Vives
-
Disagreement and Learning: Dynamic Patterns of Trade
By Snehal Banerjee and Ilan Kremer