80 Pages Posted: 15 Jul 2010 Last revised: 16 Nov 2013
Date Written: August 2013
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
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
By Bing Liang