Faculty of Economics and Business Administration Publications Database

Dynamic risk exposures in hedge funds

Authors:
Billio, Monica
Getmansky, Mila
Source:
Volume: 56
Number: 11
Pages: 3517 - 3532
Month: November
ISSN-Print: 0167-9473
Link External Source: Online Version
Year: 2012
Keywords: Hedge funds; Regime-switching models; Risk management; Liquidity; Financial crises
Abstract:

A regime-switching beta model is proposed to measure dynamic risk exposures of hedge funds to various risk factors during different market volatility conditions. Hedge fund exposures strongly depend on whether the equity market (S&P 500) is in the up, down, or tranquil regime. In the down-state of the market, when market volatility is high and returns are very low, S&P 500, Small–Large, Credit Spread, and VIXVIX are common risk factors for most of the hedge fund strategies. This suggests that hedge fund exposures to the market, liquidity, credit, and volatility risks change depending on market conditions, and these risks are potentially common factors for the hedge fund industry in the down-state of the market.

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