Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies?
60 Pages Posted: 15 Jul 2020
Date Written: July 2020
We test whether the unconventional monetary policy (UMP) announcements by the Federal Reserve and the European Central Bank represent a risk factor for the hedge fund industry as a whole and for ten commonly used strategies in particular. Using modified event studies and Markov switching models, we find that UMP announcements represent a risk factor for Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Fixed Income Arbitrage strategies as well as the Multi-Strategy type. We further test whether UMP announcements have an indirect effect on hedge funds’ performance through breaks in the parameters of the conventional risk factors. Using Chow and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most of the UMP announcements correspond to break dates for the traditional factor loadings.
Keywords: Hedge fund strategies, unconventional monetary policy, risk factors, modified event studies, Markov switching models, breakpoints tests
JEL Classification: G12, G11, G17, C32, C53
Suggested Citation: Suggested Citation