62 Pages Posted: 29 Jun 2011 Last revised: 15 Jan 2014
Date Written: December 14, 2011
We propose a new method to model hedge fund risk exposures using relatively high frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than changes in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.
Keywords: beta, time-varying risk, performance evaluation, window-dressing, hedge funds, mutual funds
JEL Classification: G23, G11, C22
Suggested Citation: Suggested Citation
Patton, Andrew J. and Ramadorai, Tarun, On the High-Frequency Dynamics of Hedge Fund Risk Exposures (December 14, 2011). Available at SSRN: https://ssrn.com/abstract=1874668 or http://dx.doi.org/10.2139/ssrn.1874668
By Bing Liang