Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies?

60 Pages Posted: 15 Jul 2020

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Alexei G. Orlov

Commodity Futures Trading Commission (CFTC)

Date Written: July 2020

Abstract

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

Guidolin, Massimo and Orlov, Alexei G., Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies? (July 2020). BAFFI CAREFIN Centre Research Paper No. 2020-146, Available at SSRN: https://ssrn.com/abstract=3650981 or http://dx.doi.org/10.2139/ssrn.3650981

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Alexei G. Orlov

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

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