When There is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns
80 Pages Posted: 15 Jul 2010 Last revised: 16 Nov 2013
There are 2 versions of this paper
When There is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns
When There Is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns
Date Written: August 2013
Abstract
Using a novel dataset on correlation swaps, we study the relation between correlation risk, hedge fund characteristics and their risk-return profile. We find that hedge funds' ability to create market neutral returns is often associated with a significant exposure to correlation risk, which helps to explain the large abnormal returns found in previous models. We also estimate a significant negative market price of correlation risk, which accounts for the cross-section of hedge fund excess returns. Finally, we detect a pronounced nonlinear relation between correlation risk exposure and the tail risk of hedge fund returns.
Keywords: Stochastic Correlation and Volatility, Hedge Fund Performance, Optimal Portfolio Choice
JEL Classification: D9, E3, E4, G11, G14, G23
Suggested Citation: Suggested Citation
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