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Volatility of aggregate volatility and hedge fund returns

Journal

Journal of Financial Economics

Subject

Finance

Publishing details

Journal of Financial Economics 2017 Vol 125:3 p 491-510

Authors / Editors

Agarwal V;Arisoy E Y;Naik N Y

Biographies

Narayan Naik

Publication Year

2017

Abstract

This paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version through returns on lookback straddles on the VIX index. We find that VOV exposure is a significant determinant of hedge fund returns. After controlling for fund characteristics, we document a robust and significant negative risk premium for VOV exposure in the cross section of hedge fund returns. We corroborate our results using statistical and parameterized proxies of VOV over a longer sample period.

Keywords

Uncertainty; Volatility of volatility; Hedge funds; Performance

Available on ECCH

No


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