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 |
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Hauptverfasser: | , , |
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. |
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ISSN: | 0893-9454 1465-7368 |
DOI: | 10.1093/rfs/hht070 |