Directional and Non-Directional Risk Exposures in Hedge Fund Returns

50 Pages Posted: 7 May 2011

See all articles by Georges Hübner

Georges Hübner

HEC Liège

Marie Lambert

University of Liege - HEC Management School

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance

Date Written: May 1, 2011

Abstract

This paper re-examines the ability of the factor model approach to evaluate the performance of the Equity Hedge, Event Driven, Macro, Relative Value, and Funds of Hedge Funds styles. As Hedge Fund returns are not normally distributed, we assign a premium to higher-order comoments of Hedge Fund returns with the US market aggregate. In addition to traditional asset- (conditioned by the levels of some information variables) and option-based factors, our analysis incorporates two sets of distributional premiums that have not yet been exploited in Hedge Fund asset pricing. We show that US higher-moment equity risk premiums constructed through hedge portfolios on covariance, coskewness, and cokurtosis risks are significant for Equity Hedge, Event Driven, and Macro Hedge Fund styles. Furthermore, we provide evidence that there is still much information embedded in option prices, particularly in the implied higher-moments of Bakshi et al. (2003). These premiums increase the explanatory power of the models across all the Hedge Fund strategies but the Macro and Relative Value categories.

Keywords: Hedge Funds, Nonlinear Risk Premiums, Comoments, Implied Higher-Moments

JEL Classification: G10, G12

Suggested Citation

Hübner, Georges and Lambert, Marie and Papageorgiou, Nicolas A., Directional and Non-Directional Risk Exposures in Hedge Fund Returns (May 1, 2011). International Conference of the French Finance Association (AFFI), May 2011. Available at SSRN: https://ssrn.com/abstract=1833471

Georges Hübner (Contact Author)

HEC Liège ( email )

Rue Louvrex 14, Bldg. N1
Liege, 4000
Belgium
+32 42327428 (Phone)

Marie Lambert

University of Liege - HEC Management School ( email )

HEC-Liège
rue Louvrex 14
LIEGE, Liege 4000
Belgium

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
227
Abstract Views
2,214
rank
135,783
PlumX Metrics