Do Hedge Funds Dynamically Manage Systematic Risk?
University of California, Berkeley - Haas School of Business; Columbia Business School
University of Waterloo
University of Missouri, Columbia
P. Raghavendra Rau
University of Cambridge
July 27, 2014
Journal of Banking and Finance, Forthcoming
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.
Number of Pages in PDF File: 47
Keywords: Hedge Funds, Alternative Investments, Correlation Risk, Systematic Risk
JEL Classification: G11, G14, G23, G32
Date posted: October 30, 2012 ; Last revised: December 1, 2015