Journal of Financial and Quantitative Analysis Vol. 48 No. 2 2013
Zero-R2Hedge Funds and Market Neutrality
Abstract
Factor models yield an R 2 insignificantly different from 0 for one-third of hedge funds in a broad sample. These funds illustrate the concept of market neutrality and feature lower volatilities, higher Sharpe ratios, and higher alphas than other funds, indicating that they provide a successful alternative investment. However, large portfolios of zero- R 2 funds contain fully half the volatility of portfolios of other funds, suggesting that they feature substantial systematic risk. Furthermore, these funds display an increased probability of failure even after controlling for idiosyncratic volatility. These results indicate the presence of an omitted factor that exposes investors to significant downside risk.
- DOI
- 10.1017/s0022109013000112
- Volume
- 48
- Issue
- 2
- Pages
- 519-547
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref