Abstract
One can consider the concept of as having breadth and depth: Breadth reflects the number of risks to which the hedge fund is neutral, while depth reflects the completeness of the of the fund to risks. We focus on depth, and propose five different concepts for hedge funds. Mean neutrality nests the standard correlation-based defnition of neutrality. Variance neutrality, Value-at-Risk neutrality and tail neutrality all relate to the of the risk of the hedge fund to risks. Finally, complete neutrality corresponds to independence of the fund to risks. We suggest statistical tests for each concept, and apply the tests to a combined database of monthly market neutral hedge fund returns from the HFR and TASS hedge fund databases. We find that between one-quarter and one-third of these funds exhibit some significant exposure to risk.
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