Monetary Policy after the Crisis: Threat or Opportunity to Hedge Funds' Alphas?

39 Pages Posted: 3 Aug 2018

See all articles by Alexander Berglund

Alexander Berglund

Stockholm School of Economics

Massimo Guidolin

Bocconi University - Department of Finance

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Date Written: July 26, 2018

Abstract

We examine the effects of U.S. monetary policy announcements during and after the Great Financial Crisis on the average abnormal returns (the “alpha”) of the hedge fund industry as a whole and of a range of hedge strategy indices. We apply a variety of tests of increasing sophistication including simple event studies, formal tests for breaks, and Markov switching models. The event studies show that both the overall index and longshort equity and fixed income arbitrage hedge strategies were systematically affected by unexpected monetary policy announcements while other strategies appear to have been less impacted. Formal break point tests show that for all but one strategies as well as the overall index, there is evidence of five breakpoints. For the overall index and most of the sub-indices many of the endogenously determined breaks closely match a list of policy surprise dates that have been already singled out because they had strongly affected financial markets in general. Especially for the long-short equity, fixed income arbitrage, dedicated short-bias, and global macro hedge funds, there is a significant tendency for estimated alphas decline over time, following policy surprises.

Keywords: monetary policy announcements, hedge fund alpha, abnormal returns, financial

Suggested Citation

Berglund, Alexander and Guidolin, Massimo and Pedio, Manuela, Monetary Policy after the Crisis: Threat or Opportunity to Hedge Funds' Alphas? (July 26, 2018). BAFFI CAREFIN Centre Research Paper No. 2018-84. Available at SSRN: https://ssrn.com/abstract=3225600 or http://dx.doi.org/10.2139/ssrn.3225600

Alexander Berglund (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Sarfatti, 25
Milan, 20136
Italy

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