Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies?

Massimo Guidolin and Alexei Orlov

No 20146, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We test whether the unconventional monetary policy (UMP) announcements by the Federal Reserve and the European Central Bank represent a risk factor for the hedge fund industry as a whole and for ten commonly used strategies in particular. Using modified event studies and Markov switching models, we find that UMP announcements represent a risk factor for Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Fixed Income Arbitrage strategies as well as the Multi-Strategy type. We further test whether UMP announcements have an indirect effect on hedge funds’ performance through breaks in the parameters of the conventional risk factors. Using Chow and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most of the UMP announcements correspond to break dates for the traditional factor loadings.

Keywords: Hedge fund strategies; unconventional monetary policy; risk factors; modified event studies; Markov switching models; breakpoint tests (search for similar items in EconPapers)
JEL-codes: C32 C53 G11 G12 G17 (search for similar items in EconPapers)
Pages: 60
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mon
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