When There Is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns

Review of Financial Studies, 2014, Vol. 27 No.2, 581-616

Posted: 12 Oct 2013 Last revised: 8 Apr 2014

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance; Unigestion UK

Fabio Trojani

Swiss Finance Institute; University of Geneva

Multiple version iconThere are 2 versions of this paper

Date Written: September 27, 2013

Abstract

Using a novel dataset on correlation swaps, we study the relation between correlation risk, hedge fund characteristics and their risk-return profile. We find that hedge funds' ability to create market neutral returns is often associated with a significant exposure to correlation risk, which helps to explain the large abnormal returns found in previous models. We also estimate a significant negative market price of correlation risk, which accounts for the cross-section of hedge fund excess returns. Finally, we detect a pronounced nonlinear relation between correlation risk exposure and the tail risk of hedge fund returns.

Keywords: Stochastic Correlation and Volatility, Hedge Fund Performance, Optimal Portfolio Choice

JEL Classification: D9, E3, E4, G11, G14, G23

Suggested Citation

Buraschi, Andrea and Kosowski, Robert and Trojani, Fabio, When There Is No Place to Hide - Correlation Risk and the Cross-Section of Hedge Fund Returns (September 27, 2013). Review of Financial Studies, 2014, Vol. 27 No.2, 581-616. Available at SSRN: https://ssrn.com/abstract=2332739

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Unigestion UK

4 Stratford Place
London, W1C1AT
United Kingdom

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

Register to save articles to
your library

Register

Paper statistics

Abstract Views
587
PlumX Metrics