Do Hedge and Merger Arbitrage Funds Actually Hedge? A Time-Varying Volatility Spillover Approach
Posted: 3 May 2021
Date Written: April 27, 2021
We examine the interaction between funds implementing hedge and merger arbitrage strategies and a set of traditional assets comprising equities, bonds, gold, crude oil, currency, commodities and real estate, by applying a time-varying spillover approach for the period 1/1/2010-7/31/2020. Results indicate that the funds absorb the fewest shocks from equities, crude oil, gold and currency compared to commodities, bonds and real estate. Furthermore, we test the effective hedging ability of these funds by estimating hedge ratios and optimal portfolio weights. Taking a short position in the volatility of the funds provides impeccable hedging effectiveness for all asset classes, except currency.
Keywords: Alternative investments, Connectedness, Hedge replication, Merger arbitrage, Portfolio diversification COVID-19
JEL Classification: C32, C58, G11, G15, G34
Suggested Citation: Suggested Citation