![]() Thus, it appears that hedge fund strategies may succeed quite well in monitoring their exposure to shocks, especially by modifying their betas, in order to optimize their risk-return trade-off in high and low regimes. Hedge-fund strategies could even aim at “decorrelating” their transactions from financial markets when they are bearish with the help of short sales, fire sales, hedging operations, and/or deleveraging (Brunnermeier and Pedersen 2009 Shleifer and Vishny 2010 Brunnermeier and Sannikov 2014). Hence, hedge funds seem to be good market timers and arbitrageurs. ( 2019) contend that hedge funds are associated with “smart money” in the sense that they attenuate market anomalies. Consistent with this finding, Calluzzo et al. The literature indicates that hedge funds monitor their risk exposure in order to take more risk in high regimes (i.e., expansions) and less risk in low regimes (i.e., recessions). 2017 Racicot and Théoret 2016 Thomson and van Vuuren 2018 Lambert and Platania 2016, 2020 Racicot et al. 2012 Jawadi and Khanniche 2012 Bali et al. The exposure of hedge-fund returns to risk factors, especially the market risk premium, has been made time-varying relatively recently, particularly since the subprime crisis (Holmes and Faff 2008 Billio et al. These options span various forms of market timing by portfolio managers (Glosten and Jagannathan 1994 Agarwal and Naik 2004 Stafylas et al. Since these transactions are option-like, the dynamic dimension was initially introduced in hedge-fund asset pricing models by resorting to the prices of standard options (long or short puts) or to more complex structured products (e.g., lookback straddles) as additional factors in conventional asset pricing models (Fung and Hsieh 1997, 2001, 2004 Mitchell and Pulvino 2001 Agarwal and Naik 2004). Indeed, their transactions are designed to be nonlinear or highly nonlinear with respect to the underlying assets. Hedge fund strategies should be studied in a dynamic setting (Fung and Hsieh 1997, 2001, 2004). We find that illiquidity and VIX shocks are the major drivers of systemic risk in the hedge fund industry. Our results suggest that the hedge fund strategies’ betas respond more to illiquidity uncertainty than to illiquidity risk during crises. During crises, the former seek to capture non-traditional risk premia by deliberately increasing their systematic risk while the later focus more on minimizing risk. We find that countercyclical strategies have an investment technology which differs from procyclical ones. Our results show that the behavior of hedge fund strategies regarding the monitoring of systematic risk is highly nonlinear in extreme scenarios-especially during the subprime crisis. In a robustness check, using TVAR (Balke 2000), we simulate the reaction of hedge fund strategies’ betas in extreme scenarios allowing moderate and strong adverse shocks. Using the local projection method (Jordà 2004, 2005, 2009), we forecast the dynamic responses of the betas of hedge fund strategies to macroeconomic and financial shocks-especially volatility and illiquidity shocks-over the subprime crisis in order to investigate their market timing activities. ![]() The subprime crisis was quite damaging for hedge funds. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |