Relative Value Hedge Funds: A Behavioral Modeling of Hedge Fund Risk and Return Factors

This chapter examines the performances of various hedge fund strategies based on various reward-to-risk ratios after the 2008 global crisis. We document that a majority of hedge fund strategies deliver lower average returns compared to equities and bonds; yet the volatilities of their returns have also been low. The equity hedge strategy has the highest reward-to-risk ratios among the major strategy categories, whereas the relative value arbitrage strategy has the lowest. Technology/healthcare, merger arbitrage, discretionary thematic, and asset-backed arbitrage strategies tend to have the highest reward-to-risk ratios in their respective categories. Time-series regressions of hedge fund strategy returns on various fund pricing factors provide evidence that hedge funds, on average, do not generate abnormal returns once the pricing factors are controlled for. We also document that hedge fund strategy returns generally load negatively on the bond market and aggregate credit risk factors and positively on the market portfolio.

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Investment Strategies of Hedge Funds

10.1093/oxfordhb/9780198840954.013.9 ◽

2021 ◽

pp. 112-135

Author(s):

Hany A. Shawky

Keyword(s):

Capital Structure ◽

Hedge Funds ◽

Yield Curve ◽

Hedge Fund ◽

Investment Strategies ◽

Fixed Income ◽

Relative Value ◽

Merger Arbitrage ◽

Arbitrage Strategy ◽

And Performance

This chapter reviews a number of different hedge fund strategies, including equity hedge, long/short, market neutral, relative value arbitrage, convertible arbitrage strategy, capital structure arbitrage strategy, fixed income arbitrage strategy, yield curve arbitrage strategy, other relative value arbitrage strategies, emerging markets strategies, global macro strategies, event driven strategies, distressed securities, and merger arbitrage strategies. In addition, the author discusses the growth and performance of different strategies, as well as fraud, fund failures, activism, and regulation.

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AN EVALUATION OF HEDGE FUNDS: RISK, RETURN AND PITFALLS

The Singapore Economic Review ◽

10.1142/s0217590802000493 ◽

2002 ◽

Vol 47 (01) ◽

pp. 153-171 ◽

Cited By ~ 8

Author(s):

FRANCIS KOH ◽

DAVID K. C. LEE ◽

KOK FAI PHOON

Keyword(s):

Hedge Funds ◽

Legal Status ◽

Hedge Fund ◽

Empirical Work ◽

Risk And Return ◽

Net Worth ◽

Empirical Risk ◽

And Performance ◽

Short Sell ◽

Risk Dimensions

Hedge funds are collective investment vehicles fast becoming popular with high net worth individuals as well as institutional investors. These are funds that are often established with a special legal status that allows their investment managers a free hand to use derivatives, short sell and exploit leverage to raise returns and cushion risk. Given that they have substantial latitude to invest, it is instructive to examine the performance of hedge funds as compared to other forms of managed funds. This paper provides an overview of hedge funds and discusses their empirical risk and return profiles. It also poses some concerns regarding the empirical measurements. Given the complexity of hedge fund investments, meaningful analytical methods are required to provide greater risk transparency and performance reporting. Hedge fund performance is also beset by a number of practical issues generating "practical risks". These risks are not fully addressed by the usual risk-adjusted performance measures in the literature. A penalty function to discount these extraneous risk dimensions is proposed. The paper concludes that further empirical work is required to provide informative statistics about the risk and return of hedge funds.

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Risk Measurement and Management for Hedge Funds

10.1093/oso/9780190607371.003.0016 ◽

2017 ◽

Author(s):

Guillaume Weisang

Keyword(s):

Hedge Funds ◽

Value At Risk ◽

Risk Measures ◽

Hedge Fund ◽

Risk Measurement ◽

Tail Risk ◽

Equity Risk ◽

Wide Range ◽

Measurement Tools ◽

Hedge Fund Risk

Risk measurement and management is an important and complex subject for hedge fund stakeholders, managers, and investors. Given that hedge funds dynamically trade a wide range of financial instruments, their returns show tail risk and nonlinear characteristics with respect to many financial markets that require advanced downside risk measures, such as value-at-risk, expected shortfall, and tail risk, to capture risk adequately. This chapter reviews the nature of these risks and presents the measurement tools needed, focusing on fixed-income instruments, derivative securities, and equity risk measurement, and stressing the importance of frequent assessment to capture the possibly rapidly changing risk profiles of hedge funds. This chapter also provides an overview of the linear factor models that investors often use to measure hedge fund risk exposures along many risk factors.

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The Impact of Leverage on Hedge Fund Risk and Return

The Journal of Alternative Investments ◽

10.3905/jai.2005.491497 ◽

2005 ◽

Vol 7 (4) ◽

pp. 10-21 ◽

Cited By ~ 18

Author(s):

Thomas Schneeweis ◽

George A Martin ◽

Hossein B Kazemi ◽

Vassilis Karavas

Keyword(s):

Hedge Fund ◽

Risk And Return ◽

Hedge Fund Risk ◽

The Impact

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Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis

Finance and Economics Discussion Series ◽

10.17016/feds.2021.038 ◽

2021 ◽

Vol 2021 (037) ◽

pp. 1-68

Author(s):

Mathias S. Kruttli ◽

◽

Phillip J. Monin ◽

Lubomir Petrasek ◽

Sumudu W. Watugala ◽

...

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Cash Holdings ◽

Liquidity Management ◽

Regulatory Constraints ◽

Relative Value ◽

Share Restrictions ◽

Arbitrage Trading ◽

Hedge Fund Returns

Hedge fund gross U.S. Treasury (UST) exposures doubled from 2018 to February 2020 to $2.4 trillion, primarily driven by relative value arbitrage trading and supported by corresponding increases in repo borrowing. In March 2020, amid unprecedented UST market turmoil, the average UST trading hedge fund had a return of -7% and reduced its UST exposure by close to 20%, despite relatively unchanged bilateral repo volumes and haircuts. Analyzing hedge fund-creditor borrowing data, we find the large, more regulated dealers provided disproportionately more funding during the crisis than other creditors. Overall, the step back in hedge fund UST activity was primarily driven by fund-specific liquidity management rather than dealer regulatory constraints. Hedge funds exited the turmoil with 20% higher cash holdings and smaller, more liquid portfolios, despite low contemporaneous outflows. This precautionary flight to cash was more pronounced among funds exposed to greater redemption risk through shorter share restrictions. Hedge funds predominantly trading the cash-futures basis faced greater margin pressure and reduced UST exposures and repo borrowing the most. After the market turmoil subsided following Fed intervention, hedge fund returns recovered quickly, but UST exposures did not revert to pre-shock levels over the subsequent months.

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