Bear Market Risk and the Cross-Section of Hedge Fund Returns

58 Pages Posted: 2 Apr 2020 Last revised: 16 Mar 2021

See all articles by Thang Ho

Thang Ho

Lancaster University - Department of Accounting and Finance

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance

George Jiaguo Wang

Lancaster University Management School; New York University - Stern School of Business

Date Written: March 1, 2020

Abstract

We examine the presence of a premium for bear market risk – innovation in the probability of future bear market states – in the cross-section of hedge fund returns. Bear beta, the sensitivity of hedge funds to returns of a bear spread portfolio controlling for the market, is a direct way to classify funds as insurance buyers or sellers. We find that low bear beta funds (insurance sellers) outperform high bear beta funds (insurance buyers) by 0.58% per month on average, outperform even during market crashes, but underperform when bear market risk is realized. This contradicts the conventional belief that insurance sellers should be more exposed to realized crash risk.

Keywords: hedge funds, bear market risk, bear beta, Bear factor, market-hedged Bear factor

JEL Classification: G11, G12, G23

Suggested Citation

Ho, Thang and Kagkadis, Anastasios and Wang, George Jiaguo, Bear Market Risk and the Cross-Section of Hedge Fund Returns (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3551136 or http://dx.doi.org/10.2139/ssrn.3551136

Thang Ho

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Anastasios Kagkadis (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

George Jiaguo Wang

Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, Lancashire LA1 4YX
United Kingdom
+44 1524 592 577 (Phone)

HOME PAGE: http://www.lancaster.ac.uk/lums/people/george-wang

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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