Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 125, Issue 3, Pages 491-510Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2017.06.015
Keywords
Uncertainty; Volatility of volatility; Hedge funds; Performance; Risk
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Funding
- Dauphine-Amundi Foundation Chair in Asset Management
- Centre for Financial Research (CFR) in Cologne
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This paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version through returns on lookback straddles on the Chicago Board Options Exchange (CBOE) volatility index, VIX. We find that VOV exposure is a significant determinant of hedge fund returns. After controlling for fund characteristics, we find a robust and significant negative risk premium for VOV exposure in the cross section of hedge fund returns. We corroborate our results using statistical and parameterized proxies of VOV over a longer sample period. (c) 2017 Elsevier B.V. All rights reserved.
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