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

56 Pages Posted: 2 Apr 2020

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 propose the bear beta, i.e. the sensitivity of hedge funds to a bear spread portfolio orthogonalized to the market, as a novel way of classifying 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. The negative relation between bear beta and future hedge fund returns is not subsumed by a large set of fund characteristics and risk exposures. Consistent with a risk-based explanation, this relation remains negative during market crashes but turns positive during periods of increasing bear market concerns.

Keywords: hedge funds, bear market risk, bear beta, put options

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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