50 Pages Posted: 22 Mar 2010 Last revised: 29 Jun 2011
Date Written: April 2, 2010
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: Suggested Citation
By Bing Liang