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Crises and Hedge Fund Risk


  • Monica Billio
  • Mila Getmansky
  • Loriana Pelizzon


We study the effect of financial crises on hedge fund risk. Using a regime-switching beta model, we separate systematic and idiosyncratic components of hedge fund exposure. The systematic exposure to various risk factors is conditional on market volatility conditions. We find that in the high-volatility regime (when the market is rolling-down and is likely to be in a crisis state) most strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit a high volatility regime of the idiosyncratic risk, which could be attributed to contagion among hedge fund strategies. In our sample this event happened only during the Long-Term Capital Management (LTCM) crisis of 1998. Other crises including the recent subprime mortgage crisis affected hedge funds only through systematic risk factors, and did not cause contagion among hedge funds.

Suggested Citation

  • Monica Billio & Mila Getmansky & Loriana Pelizzon, 2008. "Crises and Hedge Fund Risk," Yale School of Management Working Papers amz2561, Yale School of Management, revised 01 Oct 2009.
  • Handle: RePEc:ysm:somwrk:amz2561

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    References listed on IDEAS

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    Cited by:

    1. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    2. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    3. Nicole M. Boyson & Christof W. Stahel & René M. Stulz, 2010. "Hedge Fund Contagion and Liquidity Shocks," Journal of Finance, American Finance Association, vol. 65(5), pages 1789-1816, October.
    4. Slavutskaya, Anna, 2013. "Short-term hedge fund performance," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4404-4431.
    5. Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene M., 2011. "Liquidity Shocks and Hedge Fund Contagion," Working Paper Series 2011-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Bali, Turan G. & Brown, Stephen J. & Caglayan, Mustafa Onur, 2011. "Do hedge funds' exposures to risk factors predict their future returns?," Journal of Financial Economics, Elsevier, vol. 101(1), pages 36-68, July.

    More about this item


    Hedge Fund; Risk Management; Financial Crisis;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation


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