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Volatility of Aggregate Volatility and Hedge Fund Returns

64 Pages Posted: 29 Sep 2014 Last revised: 29 Jul 2016

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Yakup Eser Arısoy

Université Paris Dauphine - DRM Finance

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: July 26, 2016

Abstract

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

Suggested Citation

Agarwal, Vikas and Arısoy, Yakup Eser and Naik, Narayan Y., Volatility of Aggregate Volatility and Hedge Fund Returns (July 26, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2502352 or http://dx.doi.org/10.2139/ssrn.2502352

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Yakup Eser Arısoy (Contact Author)

Université Paris Dauphine - DRM Finance ( email )

Place du Maréchal de Lattre de Tassigny
Cedex 16
Paris, 75775
France
+33144054360 (Phone)
+33144054023 (Fax)

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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