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Risk and beta anatomy in the hedge fund industry

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  • Roberto Savona

Abstract

Based on a Bayesian time-varying beta model, we explore how the systematic risk exposures of hedge funds vary over time conditional on some exogenous variables that managers are assumed to use in changing their trading strategies. Using data from CSFB/Tremont indices over the period January 1994-September 2008, we found that (1) volatility, changes in T-bill, term spread and shocks in liquidity significantly impact the time variation of hedge fund betas; (2) when mean reversion and instruments in beta become predominant, hedge funds tend to be more risky, more dynamic and less dependent by their own style benchmark; (3) if risk exposure is assumed to be constant while it is time-varying, performance appraisal can be seriously distorted and overestimated.

Suggested Citation

  • Roberto Savona, 2014. "Risk and beta anatomy in the hedge fund industry," The European Journal of Finance, Taylor & Francis Journals, vol. 20(1), pages 1-32, January.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:1:p:1-32
    DOI: 10.1080/1351847X.2011.649216
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    Cited by:

    1. Huang, Ying Sophie & Chen, Carl R. & Kato, Isamu, 2017. "Different strokes by different folks: The dynamics of hedge fund systematic risk exposure and performance," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 367-388.
    2. Savona, Roberto, 2014. "Hedge fund systemic risk signals," European Journal of Operational Research, Elsevier, vol. 236(1), pages 282-291.
    3. Lambert, Marie & Platania, Federico, 2020. "The macroeconomic drivers in hedge fund beta management," Economic Modelling, Elsevier, vol. 91(C), pages 65-80.
    4. Dragomirescu-Gaina, Catalin & Philippas, Dionisis & Tsionas, Mike G., 2021. "Trading off accuracy for speed: Hedge funds' decision-making under uncertainty," International Review of Financial Analysis, Elsevier, vol. 75(C).

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