Do Hedge Funds Exploit Rare Disaster Concerns?
87 Pages Posted: 2 Jun 2013 Last revised: 1 May 2017
Date Written: April 2017
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: Suggested Citation