Abstract
We investigate an important question for institutional investors — namely, which hedge fund investing styles help to hedge against bad times? We define good versus bad times as (1) up and down equity market regimes derived from the 200-day moving average of the SP in contrast, other styles remain substantially exposed to — or become more exposed to — particular risk factors and correspondingly suffer large losses during bad times. In the context of “balanced” 40-30-30 ortfolios that allocate across U.S. stocks, bonds, and individual hedge fund styles, we find that the Global Macro, Managed Futures, and Multi-Strategy styles provide large investors with especially valuable hedges against bad times.
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