Do hedge funds dynamically manage systematic risk? |
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| Institution: | 1. Department of Industrial and Management Engineering, POSTECH, Pohang, Gyeongbuk, Korea;2. Risk Management Institute, National University of Singapore, 21 Heng Mui Keng Terrace, I?3 Building #04-03, Singapore 119613\n;1. University of Alabama at Birmingham, United States;2. California State University, Fullerton, United States;3. University of Mississippi, United States;1. Department of Economics, Finance and Accounting, Frederick University Cyprus, 7 Frederickou Street, Nicosia 1036, Cyprus;2. Department of Accounting and Finance, University of Cyprus, P.O. Box 20537, CY 1678 Nicosia, Cyprus;3. Department of Accounting and Finance, University of Cyprus, P.O. Box 20537, CY 1678 Nicosia, Cyprus; School of Management and Business, King''s College London; and Sloan School of Management, MIT |
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| Abstract: | Defining systematic risk management (SRM) skill as persistently low fund systematic risk, we find evidence of time varying allocation of hedge fund management effort across the business cycle. In weak market states, skilled managers focus on minimization of systematic risk via dynamic reallocations across asset classes at the cost of fund alpha and foregoing market timing opportunities. As markets strengthen, attention shifts to asset selection within consistent asset classes. The superior performance of low systematic risk funds previously documented arises due to the superior asset selection ability of managers in strong market states. Incremental allocations by investors arise due to this superior performance and not due to recognition of SRM skill. |
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| Keywords: | Hedge funds Systematic risk Alternative investments Correlation risk |
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