Work

Downside risk and hedge fund returns

Year: 2024

Type: article

Abstract: This study compares the predictive power of downside risk for hedge funds and fund of hedge funds returns. We find a positive relationship between downside risk and return for hedge funds but not for funds of hedge funds. This result is robust to the downside risk measure employed and additional control variables. Furthermore, we find that funds of hedge funds perform significantly worse than hedge funds during adverse equity market regimes, exhibiting an inverse (negative) risk–return relationship. Finally, we form realistic portfolios to determine whether an investor can construct a portfolio that outperforms the average fund of hedge funds. These portfolios display superior risk-adjusted performance and rank among the top performers of funds of hedge funds in our sample.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2024.107345

Authors: Christos Argyropoulos, Ekaterini Panopoulou, Spyridon Vrontos

Institution: University of Essex

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,240

Funder: Economic and Social Research Council