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Do Hedge Funds Dynamically Manage Systematic Risk?

47 Pages Posted: 30 Oct 2012 Last revised: 1 Dec 2015

Ethan Namvar

University of California, Berkeley - Haas School of Business; Columbia Business School

Blake Phillips

University of Waterloo

Kuntara Pukthuanthong

University of Missouri, Columbia

P. Raghavendra Rau

University of Cambridge

Date Written: July 27, 2014

Abstract

Defining systematic risk management (SRM) skill as persistently low fund systematic risk, we find evidence of time varying allocation of hedge fund management effort across the business cycle. In weak market states, skilled managers focus on minimization of systematic risk via dynamic reallocations across asset classes at the cost of fund alpha and foregoing market timing opportunities. As markets strengthen, attention shifts to asset selection within consistent asset classes. The superior performance of low systematic risk funds previously documented arises due to the superior asset selection ability of managers that jointly possess SRM skill. Incremental allocations by investors arise due to this superior performance and not due to recognition of SRM skill.

Keywords: Hedge Funds, Alternative Investments, Correlation Risk, Systematic Risk

JEL Classification: G11, G14, G23, G32

Suggested Citation

Namvar, Ethan and Phillips, Blake and Pukthuanthong, Kuntara and Rau, P. Raghavendra, Do Hedge Funds Dynamically Manage Systematic Risk? (July 27, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2168785 or http://dx.doi.org/10.2139/ssrn.2168785

Ethan Namvar

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7989 (Phone)

HOME PAGE: http://haas.berkeley.edu

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Blake Phillips (Contact Author)

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

P. Raghavendra Rau

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

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

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