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When There Is No Place to Hide: Correlation Risk and the Cross-Section of Hedge Fund Returns

Author

Listed:
  • Andrea Buraschi
  • Robert Kosowski
  • Fabio Trojani

Abstract

Using a novel data set on correlation swaps, we study the relation between correlation risk, hedge fund characteristics, and their risk-return profile. We find that the ability of hedge funds to create market-neutral returns is often associated with a significant exposure to correlation risk, which helps to explain the large abnormal returns found in previous models. We also estimate a significant negative market price of correlation risk, which accounts for the cross-section of hedge fund excess returns. Finally, we detect a pronounced nonlinear relation between correlation risk exposure and the tail risk of hedge fund returns.

Suggested Citation

  • Andrea Buraschi & Robert Kosowski & Fabio Trojani, 2014. "When There Is No Place to Hide: Correlation Risk and the Cross-Section of Hedge Fund Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 581-616.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:2:p:581-616.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht070
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