Relationship Between Risk Exposure, Volatility Forecasting, and Financial Performance of Hedge Funds

Poor hedge fund performance can impede the financial performance of a business organization. Despite the success of hedge funds, they incurred a loss of 33% during the global economic recession of 2007-2009. Understanding volatility and risk exposures are vital for investors and managers to increase hedge fund returns in various market conditions. Grounded in Markowitz’s modern portfolio theory, the purpose of this quantitative correlational study was to examine the relationship between hedge fund risk exposure, volatility forecasting, and financial performance. Data were collected from archival data from the HedgeNews Africa database and financial databases in South Africa between 2007 and 2020. The results of the multiple linear regression analysis indicated the model was able to predict the financial performance of hedge funds significantly, F(2, 149) = 238, p \u3c 0.001, R2 = .950, with risk exposure (3 month-credit spread), (β = -0.789, t = -9.417, p \u3c 0.001), accounting for the highest contribution to the model. Volatility forecasting did not explain any significant variance in the financial performance of hedge funds. A key recommendation for hedge fund managers is to include risk exposure to maximize financial performance. The implications for positive social change include the potential for maximum profits in turbulent market conditions for institutional and individual investors, which could be applied to provide social amenities for communities and improve the welfare of people