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Dissecting hedge funds' strategies

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  • Noori, Mohammad
  • Hitaj, Asmerilda

Abstract

This paper dissects the dynamics of the hedge fund industry with four financial markets, including the equity market, commodities, currencies, and debt market by employing a large number of assets from these markets. We employ four main representative hedge fund strategy indices, and a cap-weighted global index to estimate an asymmetric dynamic conditional correlation (ADCC) GJR-GARCH model using daily data from April 2003 to May 2021. We break down the performance, riskiness, investing style, volatility, dynamic correlations, and shock transmissions of each hedge fund strategy thoroughly. Further, the impact of commodity futures basis on hedge funds' return is analyzed. Comparing the dynamic correlations during the 2008 global financial crisis (GFC) with COVID-19 pandemic reveals changing patterns in hedge funds' investing styles. There are strong and pervasive shock spillovers from hedge fund industry to other financial markets, especially to futures commodities. An increase in the futures basis of several commodities drives up hedge funds' performance. While hedge fund industry underperforms compared to equity market and commodities, the risk-reward measures show that hedge funds are superior to other markets, and safer than the bond market.

Suggested Citation

  • Noori, Mohammad & Hitaj, Asmerilda, 2023. "Dissecting hedge funds' strategies," International Review of Financial Analysis, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:finana:v:85:y:2023:i:c:s1057521922004033
    DOI: 10.1016/j.irfa.2022.102453
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    More about this item

    Keywords

    Hedge funds; Commodity futures; Volatility modelling; Financial markets; Futures basis; COVID-19;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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