Seminar
Do hedge fund managers manage systematic and correlation risks?
Finance
Speaker: | Raghavendra Rau, Judge Business School, Cambridge |
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Date: | Friday 18 May 2012 |
Time: | 2:00 pm |
Location: | Room 0.28 Streatham Court |
Further details
We examine fund and managerial level ability to manage systematic and correlation risks. Hedge fund systematic risk varies across the cycle, increasing during periods of stress in financial markets. Better educated and more experienced managers have greater skill in managing systematic and correlation risks and this ability is more pronounced during down markets. Funds with higher and increasing systematic and correlation risks realize significantly lower flows. Investors recognize skill in managing systematic risk and reward funds with persistently low systematic risk with incremental flows. The relation between flow and systematic risk is markedly asymmetric, with investors showing little sensitivity to systematic risk decreases regardless of market conditions. We find evidence that these preferences are rational based on market timing and performance analysis. Although investors pay high fees to invest in low systematic risk funds, these higher costs are more than offset by the superior performance of the funds. We also find that funds appear to preferentially time fee increases to coincide with decreases in systematic risk.