Traditional and Alternative Risk: Application to Hedge Fund Returns

Sentiment Risk and Hedge Fund Returns

This paper documents a new and important cross-sectional determinant of hedge fund returns, their exposures to sentiment risk, measured as beta of fund returns to fluctuations in sentiment proxies. For a large sample of equity-oriented hedge funds, those whose sentiment beta ranks in the top decile subsequently outperform the bottom decile by 0.67% per month, after controlling for fund’s exposu...

Hedge Fund Replication: Traditional Beta, Alternative Beta, and Alpha

Traditional betas refer to the sensitivity of returns to traditional securities, such as stocks, bonds and cash. Alternative betas represent sensitivity to other systematic market factors, such as credit spreads, higher yielding or ‘carry’ currencies, volatility, illiquidity, and other potential return sources (Exhibit 1). ‘Alpha’ is often synonymous with manager skill, but perhaps is better th...

Failure Risk and the Cross-Section of Hedge Fund Returns

On average, hedge funds experience slow failures rather than sudden crashes. I model a fund’s probability of failure using a dynamic logit regression and find that fund failures are predicted by even 7-month lagged information. Hedge funds fail slowly as investors withdraw their funds over a period of time because of poor performance. Also, longer share restriction periods and the presence of m...

Systematic risk and the cross-section of hedge fund returns

Directional and Non-Directional Risk Exposures in Hedge Fund Returns

This paper re-examines the ability of the factor model approach to evaluate the performance of the Equity Hedge, Event Driven, Macro, Relative Value, and Funds of Hedge Funds styles. As Hedge Fund returns are not normally distributed, we assign a premium to higher-order comoments of Hedge Fund returns with the US market aggregate. In addition to traditional asset(conditioned by the levels of so...