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Journal of Banking & Finance Vol. 64 2016

Do hedge funds dynamically manage systematic risk?

Ethan Namvar1; Blake Phillips2; Kuntara Pukthuanthong3,4; P Raghavendra Rau

1 University of California, Berkeley · 2 University of Waterloo · 3 University of Missouri · 4 Cornell University

open access

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.

DOI
10.1016/j.jbankfin.2015.11.014
Volume
64
Pages
1-15
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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