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Timing the volatility risk of beta anomaly: Evidence from hedge fund strategies

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  • Ma, Tianyi
  • Tee, Kai-Hong
  • Li, Baibing

Abstract

Hedge funds are known to engage in the betting-against-beta (BAB) strategy arising from beta-anomaly-related market mispricing. This paper examines if equity-oriented hedge funds time the volatility risk when executing the BAB strategy. We apply realised and downside volatility risk measures to assess the BAB strategy. We show that for top volatility risk timers, older funds tend to be better risk timers, while among the bottom volatility risk timers, younger and larger-sized funds stand out as stronger timers of BAB volatility. We observe that the Long/Short Equity funds show evidence as the strongest volatility risk timers of BAB strategy when the market condition turned bad. This is supported by their other effective timing strategies at the same time, including timing the market sentiment. Our findings provide important references for private investors when selecting hedge funds as risk management is crucial to the success/failure of any investments.

Suggested Citation

  • Ma, Tianyi & Tee, Kai-Hong & Li, Baibing, 2022. "Timing the volatility risk of beta anomaly: Evidence from hedge fund strategies," International Review of Financial Analysis, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000667
    DOI: 10.1016/j.irfa.2022.102095
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    References listed on IDEAS

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    Cited by:

    1. Insana, Alessandra, 2023. "Betting against beta with intraday and overnight signals," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Betting against beta; Hedge funds; Volatility risk timing ability;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • F3 - International Economics - - International Finance

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