Author
Bali, T. G., Brown, S. J., Çağlayan, Mustafa Onur
Publication Date
2012-10
Publication Place
-
Elsevier
Subject
Hedge funds, Systematic risk, Residual risk, Return predictability
Type
Periodical
Language
English
Digital
Yes
Manuscript
No
Library
Özyeğin University
Library Asset ID
0304-405X
Record ID
dcb4b729-f6d7-421a-9073-8d695dfd02e6
Library Location
Economics
Date
2012-10
Sample Text
This paper investigates the extent to which market risk, residual risk, and tail risk explain the cross-sectional dispersion in hedge fund returns. The paper introduces a comprehensive measure of systematic risk (SR) for individual hedge funds by breaking up total risk into systematic and fund-specific or residual risk components. Contrary to the popular understanding that hedge funds are market neutral, we find that systematic risk is a highly significant factor explaining the dispersion of cross-sectional returns while at the same time measures of residual risk and tail risk seem to have little explanatory power. Funds in the highest SR quintile generate 6% more average annual returns compared with funds in the lowest SR quintile. After controlling for a large set of fund characteristics and risk factors, systematic risk remains positive and highly significant, whereas the relation between residual risk and future fund returns continues to be insignificant. Hence, systematic risk is a powerful determinant of the cross-sectional differences in hedge fund returns.
DOI
10.1016/j.jfineco.2012.05.005
Cilt
106
