- Title Pages
- List of Figures
- List of Tables
- Acknowledgments
- About the Editors
- About the Contributors
- Abbreviations
- 1 Hedge Funds Fundamentals
- 2 The Economics of Hedge Funds
- 3 The Life Cycle of Hedge Funds
- 4 Characteristics of Successful Hedge Fund Managers
- 5 Hedge Fund Organization
- 6 Hedge Fund Governance
- 7 Activist Hedge Funds
- 8 The Tax Framework of Hedge Funds
- 9 Compensation and Incentives in Hedge Funds
- 10 Offshore Hedge Funds
- 11 Directional Equity Strategies of Hedge Funds
- 12 Event-Driven Hedge Fund Strategies
- 13 Global Derivatives Hedge Fund Strategies
- 14 Relative Value Hedge Fund Strategies
- 15 Multistrategy Hedge Funds
- 16 Risk Measurement and Management for Hedge Funds
- 17 Hedge Funds and Systemic Risk
- 18 Operational Risk Management for Hedge Funds
- 19 Hedge Fund Due Diligence
- 20 Hedge Fund Regulation
- 21 Issues in Hedge Fund Research
- 22 Hedge Fund Pricing
- 23 Evaluating Hedge Fund Performance
- 24 Financial Crises and Evaporating Diversification Benefits of Hedge Funds
- 25 Hedge Fund Replication
- 26 Hedge Funds and Performance Persistence
- 27 Benchmarking and Bias in Hedge Funds
- 28 Style Analysis and Consistency
- 29 Current Hedge Fund Debates and Controversies
- 30 Trends and Future Prospects of Hedge Funds
- Discussion Questions and Answers (Chapters 2–30)
- Index
Financial Crises and Evaporating Diversification Benefits of Hedge Funds
Financial Crises and Evaporating Diversification Benefits of Hedge Funds
- Chapter:
- (p.439) 24 Financial Crises and Evaporating Diversification Benefits of Hedge Funds
- Source:
- Hedge Funds
- Author(s):
Monica Billio
Mila Getmansky Sherman
Loriana Pelizzon
- Publisher:
- Oxford University Press
Diversification of risk is a potential benefit of investing in hedge funds. Using CSFB/Tremont hedge fund indices, this chapter shows that hedge fund strategies have different returns, volatility, and exposures to various systematic risk factors during tranquil times. This relation has led to the growth of the hedge industry and in particular funds of hedge funds, which provide diversification benefits by investing across different hedge fund styles. However, during financial crises, different hedge fund strategies are exposed to similar systematic risk factors. Most of the strategies become exposed to market liquidity and credit risk factors. Moreover, during the financial crises of 1998 and 2007–2008, all strategies were loading positively on the latent factor that induced positive correlation among hedge fund strategy residuals. As a result, diversification benefits incurred due to investing in different hedge fund strategies evaporated during these financial crises.
Keywords: hedge fund, financial crisis, diversification, fund of hedge funds, credit risk, market liquidity
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- Title Pages
- List of Figures
- List of Tables
- Acknowledgments
- About the Editors
- About the Contributors
- Abbreviations
- 1 Hedge Funds Fundamentals
- 2 The Economics of Hedge Funds
- 3 The Life Cycle of Hedge Funds
- 4 Characteristics of Successful Hedge Fund Managers
- 5 Hedge Fund Organization
- 6 Hedge Fund Governance
- 7 Activist Hedge Funds
- 8 The Tax Framework of Hedge Funds
- 9 Compensation and Incentives in Hedge Funds
- 10 Offshore Hedge Funds
- 11 Directional Equity Strategies of Hedge Funds
- 12 Event-Driven Hedge Fund Strategies
- 13 Global Derivatives Hedge Fund Strategies
- 14 Relative Value Hedge Fund Strategies
- 15 Multistrategy Hedge Funds
- 16 Risk Measurement and Management for Hedge Funds
- 17 Hedge Funds and Systemic Risk
- 18 Operational Risk Management for Hedge Funds
- 19 Hedge Fund Due Diligence
- 20 Hedge Fund Regulation
- 21 Issues in Hedge Fund Research
- 22 Hedge Fund Pricing
- 23 Evaluating Hedge Fund Performance
- 24 Financial Crises and Evaporating Diversification Benefits of Hedge Funds
- 25 Hedge Fund Replication
- 26 Hedge Funds and Performance Persistence
- 27 Benchmarking and Bias in Hedge Funds
- 28 Style Analysis and Consistency
- 29 Current Hedge Fund Debates and Controversies
- 30 Trends and Future Prospects of Hedge Funds
- Discussion Questions and Answers (Chapters 2–30)
- Index