Journal
REVIEW OF FINANCIAL STUDIES
Volume 27, Issue 2, Pages 581-616Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hht070
Keywords
D9; E3; E4; G11; G14; G23
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Using a novel data set on correlation swaps, we study the relation between correlation risk, hedge fund characteristics, and their risk-return profile. We find that the ability of hedge funds to create market-neutral returns is often associated with a significant exposure to correlation risk, which helps to explain the large abnormal returns found in previous models. We also estimate a significant negative market price of correlation risk, which accounts for the cross-section of hedge fund excess returns. Finally, we detect a pronounced nonlinear relation between correlation risk exposure and the tail risk of hedge fund returns.
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