Investor Behavior, Hedge Fund Returns and Strategies

50 Pages Posted: 8 Oct 2011  

Andres Bello

The University of Texas Pan American

Gokce Soydemir

California State University, Stanislaus

Jan M. Smolarski

Stockholm University

Date Written: September 22, 2011

Abstract

We quantify risks associated with investor behavior using several asset pricing models and hedge fund data. After finding that irrational sentiments play a role in hedge fund returns, our multi-beta CAPM estimations reveal that beta belonging to irrational component varies around .037 for risky hedge funds and .018 for relatively less risky ones. Investors can use this irrational beta to gauge the extent of irrational sentiments prevailing in markets and compare the values in turbulent periods with more tranquil periods to re-adjust their portfolios and use these betas as an early warning sign of future trends. It can also guide investors in avoiding those funds that display greater irrational behavior. Our approach offers investors a solid quantitative rather than subjective approach in assessing the oncoming of a financial downturn and in doing so better protect against unpredicted losses that may result from irrational trading.

Keywords: Hedge funds, investor sentiment, CAPM, APT, VAR model

JEL Classification: G12, G14, C3

Suggested Citation

Bello, Andres and Soydemir, Gokce and Smolarski, Jan M., Investor Behavior, Hedge Fund Returns and Strategies (September 22, 2011). Available at SSRN: https://ssrn.com/abstract=1932137 or http://dx.doi.org/10.2139/ssrn.1932137

Andres Bello (Contact Author)

The University of Texas Pan American ( email )

1201 W. University Drive
Edinburg, TX 78541
United States
956-665-3354 (Phone)
956-665-5020 (Fax)

Gokce Soydemir

California State University, Stanislaus ( email )

Turlock, CA 95382
United States

Jan M. Smolarski

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

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