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Hedge fund returns and uncertainty

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  • Krause, Timothy A.

Abstract

The concept of uncertainty in investment returns, as an additional consideration to the traditional mean-variance framework, is receiving increased attention in the finance literature. This article examines the financial market relationship between uncertainty and hedge fund returns, finding that a readily available proxy for uncertainty (the CBOE® VVIX index) is a useful indicator of next-month hedge fund returns. Hedge funds in the highest quintile of VVIX index sensitivity outperform those in the lowest quintile of uncertainty by 5.97% annually, on average. The results of the study indicate that the use of this parsimonious measure of uncertainty compares favorably to more complex measures of uncertainty that have previously been analyzed.

Suggested Citation

  • Krause, Timothy A., 2019. "Hedge fund returns and uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 597-601.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:597-601
    DOI: 10.1016/j.najef.2018.06.011
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    Cited by:

    1. Byounghyun Jeon & Sung Won Seo & Jun Sik Kim, 2020. "Uncertainty and the volatility forecasting power of option‐implied volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1109-1126, July.

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    More about this item

    Keywords

    VIX; VVIX; Hedge funds; Risk; Uncertainty; Volatility;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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