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Volatility of aggregate volatility and hedge fund returns

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  • Agarwal, Vikas
  • Arisoy, Y. Eser
  • Naik, Narayan Y.

Abstract

This paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version through returns on lookback straddles on the Chicago Board Options Exchange (CBOE) volatility index, VIX. We find that VOV exposure is a significant determinant of hedge fund returns. After controlling for fund characteristics, we find a robust and significant negative risk premium for VOV exposure in the cross section of hedge fund returns. We corroborate our results using statistical and parameterized proxies of VOV over a longer sample period.

Suggested Citation

  • Agarwal, Vikas & Arisoy, Y. Eser & Naik, Narayan Y., 2017. "Volatility of aggregate volatility and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 125(3), pages 491-510.
    • Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:491-510
    DOI: 10.1016/j.jfineco.2017.06.015
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    11. Trojani, Fabio & Wiehenkamp, Christian & Wrampelmeyer, Jan, 2014. "Ambiguity and Reality," Working Papers on Finance 1418, University of St. Gallen, School of Finance.
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    More about this item

    Keywords

    Uncertainty; Volatility of volatility; Hedge funds; Performance; Risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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