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

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Fabio Trojani

University of Geneva; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

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

Buraschi, Andrea and Kosowski, Robert and Trojani, Fabio, When There is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns (August 2013). Available at SSRN: https://ssrn.com/abstract=1639984 or http://dx.doi.org/10.2139/ssrn.1639984

Andrea Buraschi

The University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)

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

Imperial College Business School ( email )

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

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

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Fabio Trojani

University of Geneva ( email )

Geneva
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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