Hedge Fund Risk and Drawdowns

Abstract

In this paper, I review hedge fund risk using various commonly used measures including market betas, correlations, and porfolio drawdowns. We see a picture emerge that shows hedge funds have historically hedged a fair degree of systematic market risk, especially in the early years, offering meaningful diverisification benefits to traditional stock/bond portfolios. However, the diversification benefits for investors in hedge funds have since seemingly lessened, even if not altogether eliminated. Most recently, modest benefits bore out for hedge fund investors during the 2020 pandemic, although again much less so than in the earlier years.

Keywords: hedge funds, manager performance, asset pricing, factor analysis, performance attribution

JEL Classification: G00, G11, G12, G14, G15, G23