Volatility of Aggregate Volatility and Hedge Fund Returns
64 Pages Posted: 29 Sep 2014 Last revised: 9 Aug 2019
Date Written: July 26, 2016
This paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version through returns on lookback straddles on the VIX index. We find that VOV exposure is a significant determinant of hedge fund returns. After controlling for fund characteristics, we document a robust and significant negative risk premium for VOV exposure in the cross section of hedge fund returns. We corroborate our results using statistical and parameterized proxies of VOV over a longer sample period.
Keywords: Uncertainty, volatility of volatility, hedge funds, performance
JEL Classification: G10, G11, C13
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