Tail Risk in Hedge Funds - Evidence From Portfolio Holdings

Agarwal, Vikas ; Ruenzi, Stefan ; Weigert, Florian

Document Type: Conference presentation
Year of publication: 2014
Conference title: 6th Annual Hedge Fund Research Conference
Location of the conference venue: Paris, France
Date of the conference: 23.-24.1.2014
Publication language: English
Institution: Außerfakultäre Einrichtungen > Wissenschaftl. Einrichtungen
Business School > Internat. Finanzierung (Ruenzi 2009-)
Subject: 330 Economics
Abstract: This paper examines the tail risk in hedge funds through their exposure to downside crash risk in equity markets. Using data on hedge fund returns, we find that crash risk exposure predicts the returns of hedge funds. Furthermore, using data on hedge funds’ long equity positions as revealed in their mandatorily disclosed quarterly holdings, we find that crash risk of equity holdings on average explains more than 30% of hedge funds’ overall crash risk. This relationship holds even after controlling for different stock characteristics and is not explained by hedge funds’ exposure to an out-of-the-money put option factor as in Agarwal and Naik (2004) and factors that proxy for dynamic trading strategies as in Fung and Hsieh (2001).

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ORCID: Agarwal, Vikas ; Ruenzi, Stefan ORCID: 0000-0002-6492-1701 ; Weigert, Florian

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