47 Pages Posted: 30 Oct 2012 Last revised: 1 Dec 2015
Date Written: July 27, 2014
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: 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
By Bing Liang