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Volatility – The normally dormant factor exposure for hedge funds

Research paper by Rob Brown

Indexed on: 19 Jan '11Published on: 19 Jan '11Published in: Journal of Derivatives & Hedge Funds



Abstract

This article examines 12 common hedge fund styles to determine their exposure to volatility. Results are presented demonstrating that although volatility remains a dormant factor generating de mininis affects on both return and risk, it will occasionally surface on a rare and infrequent basis, as it did in 2007 and 2008. During such periods, which have occurred only twice since 1966, hedge fund returns can suffer a profound negative impact. Historically, such periods have been followed by similarly sized favorable rebounds.