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Discussion Paper Details

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Title: On the Dynamics of Hedge Fund Risk Exposures

Author(s): Andrew J Patton and Tarun Ramadorai

Publication Date: April 2010

Keyword(s): beta, performance evaluation, structural breaks and time-varying risk

Programme Area(s): Financial Economics

Abstract: We propose a new method to capture changes in hedge funds' exposures to risk factors, exploiting information from relatively high frequency conditioning variables. Using a consolidated database of nearly 15,000 individual hedge funds between 1994 and 2009, we find substantial evidence that hedge fund risk exposures vary significantly across months. Our new method also reveals that hedge fund risk exposures vary within months, and capturing this variation significantly improves the fit of the model. The proposed method outperforms an optimal changepoint approach to capturing time-varying risk exposures, and we find evidence that there are gains from combining the two approaches. We find that the cost of leverage, the carry trade return and the recent performance of equity indices are the most important drivers of changes in hedge fund risk exposures.

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Bibliographic Reference

Patton, A and Ramadorai, T. 2010. 'On the Dynamics of Hedge Fund Risk Exposures'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7780