Hedge Fund Styles and Macroeconomic Uncertainty

56 Pages Posted: 31 May 2016

See all articles by Marie Lambert

Marie Lambert

University of Liege - HEC Management School

Federico Platania

University of Liege; Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV); Ecole de Management Léonard De Vinci

Date Written: May 30, 2016

Abstract

We examine the dynamic trading strategies implemented by hedge fund managers using a Kalman filter. We investigate the risk drivers of dynamic trades, examining which macroeconomic variables strongly lead the time variation in fund trades. We show that hedge funds control the intensity of their exposures according to economic uncertainty and that differences between up- and down-market regimes can be observed. Commonly, Hedge funds tend to dislike high-dividend paying stocks. Besides, all hedge fund styles are shown to display pro-cyclical exposures towards directional equity factors as well as credit and liquidity risks. Small growth stocks, however, are revealed to be crisis investments whose allocation increases with unemployment, inflation or volatility. As volatility increases, the value of growth options embedded into growth stocks indeed increases. Growth stocks are shown to hedge market reversals and volatility. The outperformance of growth companies in recessions might also relate to their cost flexibility.

Keywords: Kalman filter, Markov switching, macroeconomic factors, dynamic betas

Suggested Citation

Lambert, Marie and Platania, Federico, Hedge Fund Styles and Macroeconomic Uncertainty (May 30, 2016). Available at SSRN: https://ssrn.com/abstract=2786639 or http://dx.doi.org/10.2139/ssrn.2786639

Marie Lambert

University of Liege - HEC Management School ( email )

HEC-Liège
rue Louvrex 14
LIEGE, Liege 4000
Belgium

Federico Platania (Contact Author)

University of Liege ( email )

B-4000 Liege
Belgium

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV) ( email )

92916 Paris La Defense Cedex
France

Ecole de Management Léonard De Vinci ( email )

Paris

Register to save articles to
your library

Register

Paper statistics

Downloads
58
rank
356,190
Abstract Views
321
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information