Different strokes by different folks: The dynamics of hedge fund systematic risk exposure and performance

Abstract

We study hedge fund performance and exposure to systematic risk factors over different market cycles with a sample of 1821 hedge funds from January 1994 to June 2008. Our findings suggest that hedge funds are exposed to systematic risk factors and minimizing systematic risk exposure by means of, for example, hedging does not always produce good results. Our quantile regression analyses reveal that systematic risk exposure per se does not separate high-achievers (positive alphas) from low-achievers (negative alphas). Fund performance is also conditioned on the direction of exposure. Moreover, fund exposure to the types of risk factors depends on market regimes, confirming the argument that hedge funds shift strategies. Choosing the exposure to the right risk factors in the right direction according to economic regimes separates good performers from poor ones.