A Longer Look at the Asymmetric Dependence between Hedge Funds and the Equity Market

43 Pages Posted: 1 Feb 2008 Last revised: 3 Nov 2012

Byoung Uk Kang

The Hong Kong Polytechnic University - School of Accounting and Finance

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Gunky Kim

Monash Business School

Tong Suk Kim

Korea Advanced Institute of Science and Technology (KAIST) - College of Business

Date Written: September 25, 2009

Abstract

This paper re-examines, at a range of investment horizons, the asymmetric dependence between hedge fund returns and market returns. Given the current availability of hedge fund data, the joint distribution of longer-horizon returns is extracted from the dynamics of monthly returns using the filtered historical simulation; we then apply the method based on copula theory to uncover the dependence structure therein. While the direction of asymmetry remains unchanged, the magnitude of asymmetry is attenuated considerably as the investment horizon increases. Similar horizon effects also occur on the tail dependence. Our findings suggest that nonlinearity in hedge fund exposure to market risk is more short-term in nature, and that hedge funds provide higher benefits of diversification, the longer the horizon.

Keywords: Hedge Funds, Investment Horizon Effect, Nonlinear Dependence, Tail Dependence, Copulas, Filtered Historical Simulation

JEL Classification: G23, G11, C13, C14, C15, C16

Suggested Citation

Kang, Byoung Uk and In, Francis Haeuck and Kim, Gunky and Kim, Tong Suk, A Longer Look at the Asymmetric Dependence between Hedge Funds and the Equity Market (September 25, 2009). Journal of Financial and Quantitative Analysis, Vol. 45, No. 3, June 2010, pp. 763-789. Available at SSRN: https://ssrn.com/abstract=1088913

Byoung Uk Kang (Contact Author)

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

School of Accounting and Finance
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852-2766-7085 (Phone)

HOME PAGE: http://www.af.polyu.edu.hk/people/detail/36

Francis Haeuck In

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Gunky Kim

Monash Business School ( email )

Monash University
Caulfield East, Victoria 3145
Australia

Tong Suk Kim

Korea Advanced Institute of Science and Technology (KAIST) - College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 130-722
Korea, Republic of (South Korea)

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