Review of Financial Studies Vol. 22 No. 7 2009
Are “Market Neutral” Hedge Funds Really Market Neutral?
Abstract
One can consider the concept of market neutrality for hedge funds as having breadth and depth: "breadth" reects the number of market risks to which a fund is neutral, while "depth" reects the "completeness" of the neutrality of the fund to market risks. We focus on market neutrality depth, and propose ve different neutrality concepts. "Mean neutrality" nests the standard correlation-based denition of neutrality. "Variance neutrality", "Value-at-Risk neutrality" and "tail neutrality" all relate to the neutrality of the risk of the hedge fund to market risks. Finally, "complete neutrality" corresponds to independence of the fund to market risks. We suggest statistical tests for each neutrality concept, and apply the tests to a combined database of monthly "market neutral" hedge fund returns from the HFR and TASS hedge fund databases. We nd that around one-quarter of these funds exhibit some signicant exposure to market risk.
- DOI
- 10.1093/rfs/hhn113
- Volume
- 22
- Issue
- 7
- Pages
- 2495-2530
- Language
- en
- Sources
- openalex crossref