Abstract
We investigate US hedge funds’ performance across different economic and market conditions for the longest period to date, 1990-2014. The paper examines the impact of multiple business cycles and rising/falling markets on exposures and excess returns delivered to investors. We use a twin nonlinear multi-factor agile model with pre-defined and undefined structural breaks, based on a regime switching process conditional on different states of the market. During difficult market conditions the majority of hedge fund strategies do not provide significant alphas to investors. At such times hedge funds reduce both the number of their exposures to different asset classes and their portfolio allocations. Some strategies even reverse their exposures. Directional strategies share more common exposures under all market conditions compared to non-directional strategies. Factors related to commodity asset classes are more common during these difficult conditions whereas factors related to equity asset classes are most common during good market conditions. Falling stock markets are harsher than recessions for hedge funds.
Published Version
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