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Systematic risk in hedge funds
textWe document that hedge funds with lower systematic risk exposures have higher
Sharpe ratios. These funds are more successful: they are able to charge higher fees
and manage more assets. When pressed with inflows, fund categories on average do
not lose their ability to find investments bearing no systematic risk. By contrast,
individual funds experiencing inflows above and beyond their category average increase
their systematic risk exposures. The tradeoff between performance and the
degree to which systematic risk exposures explain the returns of hedge funds has
implications for the latter’s transparency: the risks taken by outperforming hedge
funds cannot be understood solely from their monthly returns.Financ