When There Is No Place to Hide: Correlation Risk and the Cross-Section of Hedge Fund Returns

Using a novel data set on correlation swaps, we study the relation between correlation risk, hedge fund characteristics, and their risk-return profile. We find that the ability of hedge funds to create market-neutral returns is often associated with a significant exposure to correlation risk, which...

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Veröffentlicht in:The Review of financial studies 2014-02, Vol.27 (2), p.581-616
Hauptverfasser: Buraschi, Andrea, Kosowski, Robert, Trojani, Fabio
Format: Artikel
Sprache:eng
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Zusammenfassung:Using a novel data set on correlation swaps, we study the relation between correlation risk, hedge fund characteristics, and their risk-return profile. We find that the ability of hedge funds to create market-neutral returns is often associated with a significant exposure to correlation risk, which helps to explain the large abnormal returns found in previous models. We also estimate a significant negative market price of correlation risk, which accounts for the cross-section of hedge fund excess returns. Finally, we detect a pronounced nonlinear relation between correlation risk exposure and the tail risk of hedge fund returns.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hht070