Reducing Stock Risk with Hedge Funds
8 Pages Posted: 24 Jan 2016
Date Written: January 23, 2016
This paper tests the risk reduction properties of hedge fund investing against a sample of stocks ranging from 1990 through 2014. GARCH dynamic conditional correlation analysis indicates that hedge funds are a significant diversifier due to the consistent imperfect relationship between the hedge fund returns and the stock return indexes. Hedge funds serve as a weak safe haven in times of extreme stock market volatility. During periods of financial crisis, hedge funds also largely function as a weak safe haven. In contrast to their name, hedge funds do not provide a traditional “hedge” against stock risk.
Keywords: Time-varying correlation, hedge fund, hedge, safe haven
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