The Who and How of Hedge Fund Risk Shifting
Year: 2024
Type: report
Abstract: Given the emergence of hedge funds as large intermediaries whose risk-taking afects fnancial markets, we investigate whether compensation incentives distort the risk choices of fund managers. Using confidential supervisory data on hedge fund returns and characteristics, we fnd strong evidence of risk-shifting behavior consistent with managers attempting to meet performance benchmarks and maximize investor fows. Both the best- and worst-performing funds increase portfolio volatility relative to their peers, as do those below their high-water marks. Funds with permissive redemption policies and those with concentrated ownership risk shift most aggressively. Laggard managers amplify volatility by increasing leverage and modifying asset class allocations, while top performers instead pursue contrarian strategies.
DOI: 10.67236/noty6886
Authors: Spencer Andrews, Salil Gadgil
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4403973701