We show that when only a few investors own a substantial portion of a hedge fund's net asset value, flow volatility increases because investors' exogenous, idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we confirm that high investor concentration...

While it is established that idiosyncratic volatility has a negative impact on the cross-section of future stock returns, the relationship between idiosyncratic volatility and future hedge fund returns is largely unexplored. We document that hedge funds with high idiosyncratic volatility...

Using a representative sample of 13F reports providing novel information on option characteristics and prices, we document that hedge funds prefer to hold liquid high–embedded leverage options without lottery-like skewness. Various portfolios mimicking hedge funds' option holdings earn...

We examine linear correlation and tail dependence between market neutral hedge funds and the market portfolio conditional on the financial cycle. We document that the low correlation between these funds and the S&P 500 consists of a negative correlation during bear periods and a positive one...

I propose a new benchmark to evaluate hedge fund performance: the returns to shorting CBOE Volatility Index (VIX) futures. The informativeness of this benchmark leads to a new methodology that is able to predict hedge fund performance. Specifically, it separates hedge funds, ex-ante, into one...

The average hedge fund represented by the HFRI Fund Weighted Composite Index of more than 2,000 funds lost 19 percent in 2008 but turned around and gained 20 percent in 2009. Was this extreme performance due to alpha or to embedded betas? The most-quoted measure of volatility is the VIX Index....

Hedge funds' extensive use of derivatives, short-selling, and leverage and their dynamic trading strategies create significant non-normalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge...

Hedge funds' extensive use of derivatives, short-selling, and leverage and their dynamic trading strategies create significant non-normalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge...

This paper investigates the relationship between upside potential and future hedge fund returns. We measure upside potential based on the maximum monthly returns of hedge funds (MAX) over a fixed time interval, and show that MAX successfully predicts cross-sectional differences in future fund...

This paper investigates hedge funds' exposures to various financial and macroeconomic risk factors through alternative measures of factor betas and examines their performance in predicting the cross-sectional variation in hedge fund returns. Both parametric and nonparametric tests indicate a...