Geopolitical risk hedging or timing: Evidence from hedge fund strategies

Abstract

An increasing number of investors are concerned about how they can diversify risks and profits amid surging geopolitical uncertainties. Using a geopolitical risk timing/hedging model, we investigate whether hedge fund managers can effectively hedge or time geopolitical risks by adopting different trading strategies. We find that excluding those in the global macro category, hedge funds with higher minimum investments and management fees exhibit greater success in hedging geopolitical risks. Meanwhile, global macro hedge funds, which have longer lockup periods, are more adept at timing geopolitical risks by increasing their market exposures. Furthermore hedge funds which are the top geopolitical risk hedgers and timers demonstrate higher economic value than those in the bottom group over the subsequent one and three months. Our findings provide valuable insights into private investors’ selection of hedge funds during periods of heightened geopolitical risk.