Performance Implications of Hedging with Industry ETFs

25 Pages Posted: 23 Feb 2023 Last revised: 15 May 2024

See all articles by Yigit Atilgan

Yigit Atilgan

Sabanci University

K. Ozgur Demirtas

Sabanci University Graduate School of Management

A. Doruk Gunaydin

Sabanci University

MUSTAFA OZTEKIN

Sabanci University

Date Written: February 17, 2023

Abstract

Extant research documents that hedge funds which bet on positive earnings surprises manage their sector risk by shorting industry exchange-traded funds (ETFs). We add to this literature by evaluating the performance of a hypothetical hedge fund that can anticipate positive earnings news. We construct return series for a naked strategy that only takes long stock positions and a hedged strategy that also holds short positions in industry ETFs around earnings announcements with positive content. Our main result is that hedging with industry ETFs improves fund performance based on various reward-to-risk ratios. This finding holds in various equity subsamples and both strategies tend to perform better among riskier stocks.

Keywords: exchange traded funds, risk management, performance evaluation, hedge funds

JEL Classification: G11, G12, G14

Suggested Citation

Atilgan, Yigit and Demirtas, K. Ozgur and Gunaydin, A. Doruk and OZTEKIN, MUSTAFA, Performance Implications of Hedging with Industry ETFs (February 17, 2023). Global Finance Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4362264 or http://dx.doi.org/10.2139/ssrn.4362264

Yigit Atilgan (Contact Author)

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

A. Doruk Gunaydin

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956
Turkey

MUSTAFA OZTEKIN

Sabanci University

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