DP8479 On the High-Frequency Dynamics of Hedge Fund Risk Exposures

Author(s): Andrew J Patton, Tarun Ramadorai
Publication Date: July 2011
Keyword(s): beta, hedge funds, mutual funds, performance evaluation, time-varying risk, window-dressing
JEL(s): C22, G11, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8479

We propose a new method to model hedge fund risk exposures using relatively high frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than changes in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.