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Bear factor and hedge fund performance

Author

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  • Ho, Thang
  • Kagkadis, Anastasios
  • Wang, George

Abstract

We find that hedge funds that have low (negative) return covariance with the return of a bear spread portfolio (i.e., Bear factor) after controlling for the market factor, earn significantly higher returns in the cross-section. The return spread does not reflect bear risk premia; instead, it represents a low risk-high return relation. We decompose the Bear factor into different components to identify the one driving the bear beta effect on fund performance and show that the return spread can be attributed to the differential ability of low bear beta funds to reduce their market exposures when the market declines and the VIX increases (i.e., downside timing). Further analysis suggests that these fund managers are more skilled at selling overpriced insurance during volatile market periods. Overall, we propose a simple option-implied predictor of hedge fund returns and unravel a novel economic mechanism that associates the Bear factor exposure with fund performance.

Suggested Citation

  • Ho, Thang & Kagkadis, Anastasios & Wang, George, 2025. "Bear factor and hedge fund performance," Journal of Empirical Finance, Elsevier, vol. 82(C).
  • Handle: RePEc:eee:empfin:v:82:y:2025:i:c:s0927539825000337
    DOI: 10.1016/j.jempfin.2025.101611
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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