Do hedge funds time market tail risk? Evidence from option-implied tail risk |
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Authors: | Jung-Soon Shin Minki Kim Dongjun Oh Tong Suk Kim |
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Institution: | 1. Ewha School of Business, Ewha Womans University, Seoul, Republic of Korea;2. Department of Management Engineering, KAIST College of Business, Seoul, Republic of Korea;3. Mirae Asset Global Investments Co. Ltd, Seoul, Republic of Korea |
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Abstract: | This paper focuses on an unexplored dimension of fund managers’ timing ability: Market-wide tail risk implied by information in options markets. Constructing the option-implied tail risk, we investigate whether hedge fund managers can strategically time the tail risk through adjusting their exposure to changes of it. Using an extensive sample of equity-oriented hedge funds, we find strong evidence of tail risk timing ability of hedge fund managers. Furthermore, tail risk timing ability brings significant economic value to investors. Top-ranked funds outperform bottom-ranked funds by 5–7% annually after adjusting for risk factors. Our results are robust to various robustness checks. |
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Keywords: | option-implied tail risk hedge funds tail risk timing fund performance |
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