Do Hedge Funds Exploit Rare Disaster Concerns?

87 Pages Posted: 2 Jun 2013 Last revised: 1 May 2017

See all articles by George Gao

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: April 2017

Abstract

We find hedge funds that have higher return covariation with a disaster concern index, which we construct using out-of-the-money puts on sector indices, earn significantly higher returns. These funds have better skills in exploiting the market's ex ante rare disaster concerns (SED) that are not associated with disaster risk. In particular, high-SED funds on average outperform low-SED funds by 0.96% per month, but have less exposure to disaster risk. They continue to deliver superior future performance when SED is estimated using the disaster concern index purged of disaster risk premiums, and have leverage-managing and extreme-market-timing abilities.

Keywords: Rare diaster concern, hedge fund, skill

JEL Classification: G11, G12, G23

Suggested Citation

Gao, George and Gao, Pengjie and Song, Zhaogang, Do Hedge Funds Exploit Rare Disaster Concerns? (April 2017). Available at SSRN: https://ssrn.com/abstract=2273123 or http://dx.doi.org/10.2139/ssrn.2273123

George Gao

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Pengjie Gao (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
621
Abstract Views
3,142
rank
43,392
PlumX Metrics