Hedge Fund Strategies and Time-Varying Alphas and Betas

Abstract

This article compares the time-varying estimates of alphas and betas for hedge funds in bear and bull market periods. The time-varying models show that most hedge fund strategies vary their beta risk exposure in accordance with changing market conditions. Most strategies display significant positive alphas for the whole period, but none generates significant alpha in the combined bear periods. The authors also investigate a set of other beta risk factors and find that these risk factors are more significant in bull periods. Hence, in bull periods, they are able to identify a set of risk factors for hedge fund strategies, while the picture is less clear for the exposure in bear periods. However, many strategies seem to be positively correlated with the return on high-yield bonds.