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  • Systemic risk and cross-sectional hedge fund returns

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    HwangPUB2701.pdf (563.1Kb)
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    Author(s)
    Hwang, Inchang
    Xu, Simon
    In, Francis
    Kim, Tong Suk
    Griffith University Author(s)
    In, Francis H.
    Year published
    2017
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    Abstract
    This paper examines the cross-sectional relation between hedge fund returns and systemic risk. Measuring the systemic risk of an individual hedge fund by using the marginal expected shortfall (MES), we find evidence for a positive and statistically significant relation between systemic risk and hedge fund returns. The risk-adjusted return of a hedge fund portfolio with a high systemic risk is 0.64% per month higher than for one with a low systemic risk during 1994–2012, while negative performance is observed during crisis periods. The relation between systemic risk and hedge fund returns holds for both live and defunct funds. ...
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    This paper examines the cross-sectional relation between hedge fund returns and systemic risk. Measuring the systemic risk of an individual hedge fund by using the marginal expected shortfall (MES), we find evidence for a positive and statistically significant relation between systemic risk and hedge fund returns. The risk-adjusted return of a hedge fund portfolio with a high systemic risk is 0.64% per month higher than for one with a low systemic risk during 1994–2012, while negative performance is observed during crisis periods. The relation between systemic risk and hedge fund returns holds for both live and defunct funds. Moreover, the relation holds even after controlling for a large set of fund characteristics. Hence, systemic risk is a powerful determinant of cross-sectional variations in hedge fund returns. Our results imply that the positive relation between hedge fund returns and systemic risk is due to compensation for the realized losses during systemic events.
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    Journal Title
    Journal of Empirical Finance
    Volume
    42
    DOI
    https://doi.org/10.1016/j.jempfin.2017.03.002
    Copyright Statement
    © 2017 Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (http://creativecommons.org/licenses/by-nc-nd/4.0/) which permits unrestricted, non-commercial use, distribution and reproduction in any medium, providing that the work is properly cited.
    Subject
    Banking, Finance and Investment not elsewhere classified
    Applied Economics
    Econometrics
    Banking, Finance and Investment
    Publication URI
    http://hdl.handle.net/10072/339927
    Collection
    • Journal articles

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