Browsing by Author "Brown, S. J."

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    Macroeconomic risk and hedge fund returns
    (Elsevier, 2014-10) Bali, T. G.; Brown, S. J.; Çağlayan, Mustafa Onur; Economics; ÇAĞLAYAN, Mustafa Onur
    This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty. We find that the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship. After controlling for a large set of fund characteristics and risk factors, the positive relation between uncertainty betas and future hedge fund returns remains economically and statistically significant. Hence, we argue that macroeconomic risk is a powerful determinant of cross-sectional differences in hedge fund returns.
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    Systematic risk and the cross section of hedge fund returns
    (Elsevier, 2012-10) Bali, T. G.; Brown, S. J.; Çağlayan, Mustafa Onur; Economics; ÇAĞLAYAN, Mustafa Onur
    This paper investigates the extent to which market risk, residual risk, and tail risk explain the cross-sectional dispersion in hedge fund returns. The paper introduces a comprehensive measure of systematic risk (SR) for individual hedge funds by breaking up total risk into systematic and fund-specific or residual risk components. Contrary to the popular understanding that hedge funds are market neutral, we find that systematic risk is a highly significant factor explaining the dispersion of cross-sectional returns while at the same time measures of residual risk and tail risk seem to have little explanatory power. Funds in the highest SR quintile generate 6% more average annual returns compared with funds in the lowest SR quintile. After controlling for a large set of fund characteristics and risk factors, systematic risk remains positive and highly significant, whereas the relation between residual risk and future fund returns continues to be insignificant. Hence, systematic risk is a powerful determinant of the cross-sectional differences in hedge fund returns.