Conditional Properties of Hedge Funds: Evidence from Daily Returns

28 Pages Posted: 4 Mar 2007  

Ying Li

University of Washington, Bothell - Business

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

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Abstract

Using daily returns on a set of hedge fund indices, we study (i) the properties of the indices' conditional density functions and (ii) the presence of asymmetries in conditional correlations between hedge fund indices and other investments and between hedge fund indices themselves. We use the SNP approach to obtain estimates of conditional densities of hedge fund returns and then proceed to examine their properties. In general, a nonparametric GARCH(1,1) model appears to provide the best fit for all strategies. We find that the conditional third and fourth moments are significantly affected by changes in the current volatility of returns on hedge fund indices. We examine changes in the conditional probability of tail events and report significant changes in the probability of extreme events when the conditioning information changes. These results have important implications for models of hedge fund risk that rely on probability of tail events. We formally test for the presence of asymmetries in conditional correlations to determine if there is contagion between hedge funds and other investments and between various hedge fund indices in extreme down markets versus extreme up markets. We generally do not find strong evidence in support of asymmetric correlations.

Suggested Citation

Li, Ying and Kazemi, Hossein B., Conditional Properties of Hedge Funds: Evidence from Daily Returns. European Financial Management, Vol. 13, No. 2, pp. 211-238, March 2007. Available at SSRN: https://ssrn.com/abstract=967829 or http://dx.doi.org/10.1111/j.1468-036X.2006.00352.x

Ying Li (Contact Author)

University of Washington, Bothell - Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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