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On the Dynamics of Hedge Fund Risk Exposures

50 Pages Posted: 22 Mar 2010 Last revised: 29 Jun 2011

Andrew J. Patton

Duke University - Department of Economics

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2010

Abstract

We propose a new method to capture changes in hedge funds' exposures to risk factors, exploiting information from relatively high frequency conditioning variables. Using a consolidated database of nearly 15,000 individual hedge funds between 1994 and 2009, we find substantial evidence that hedge fund risk exposures vary significantly across months. Our new method also reveals that hedge fund risk exposures vary within months, and capturing this variation significantly improves the fit of the model. The proposed method outperforms an optimal changepoint approach to capturing time-varying risk exposures, and we find evidence that there are gains from combining the two approaches. We find that the cost of leverage, the carry trade return and the recent performance of equity indices are the most important drivers of changes in hedge fund risk exposures.

Keywords: hedge funds, beta, time-varying risk, performance evaluation

JEL Classification: G23, G11, C22

Suggested Citation

Patton, Andrew J. and Ramadorai, Tarun, On the Dynamics of Hedge Fund Risk Exposures (April 2, 2010). Available at SSRN: https://ssrn.com/abstract=1573218 or http://dx.doi.org/10.2139/ssrn.1573218

Andrew J. Patton (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~ap172/

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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