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Funds of hedge funds: Are they really the high society for little guys?

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  • Cui, Wei
  • Yao, Juan

Abstract

Funds of hedge funds (FOFs) have been depicted as a type of conservative vehicle to many institutional and retail investors for accessing hedge fund investment. We challenge this view by investigating the role of tail risk exposure in FOFs. We find that the tail risk exposure determines a fund’s return and significantly influences a fund’s performance over one to three-month horizon. In particular, we find that the marginal extreme losses to one unit change of tail risk exposure in bear markets nearly double the marginal extreme gains in bull markets. This non-linear payoff structure must be evaluated carefully by anyone who wishes to invest in FOFs.

Suggested Citation

  • Cui, Wei & Yao, Juan, 2020. "Funds of hedge funds: Are they really the high society for little guys?," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 346-361.
  • Handle: RePEc:eee:reveco:v:67:y:2020:i:c:p:346-361
    DOI: 10.1016/j.iref.2020.02.004
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    More about this item

    Keywords

    Fund of hedge funds; Hedge funds; Tail risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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