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Volatility of aggregate volitility and cross-section of hedge fund returns



Publishing details

IFA Working Paper

Authors / Editors

Agarwal V;Erisoy E;Naik N


Publication Year



This paper investigates empirically whether uncertainty about expected stock returns can explain the performance of hedge funds both in the cross-section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version of this measure by computing monthly returns on lookback straddles written on the VIX index. We find that VOV exposure is a significant determinant of hedge fund returns at the overall index level, at different strategy levels, and at individual fund level. We find that funds with low (more negative) VOV betas outperform funds with high VOV betas by 1.61% per month. After controlling for a large set of fund characteristics, we document a robust and significant negative risk premium for VOV exposure in the cross-section of hedge fund returns. We further show that funds with low VOV betas outperform their counterparts during the financial crisis period when uncertainty about expected returns was at its highest. On the contrary, funds with high VOV betas generate superior returns when uncertainty in the market is less.


Uncertainty; Volatility of volatility; Hedge funds; Performance


IFA Working Paper

Available on ECCH


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