Timing the volatility risk of beta anomaly: Evidence from hedge fund strategies

Tianyi Ma, Kai-Hong Tee and Baibing Li

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: Hedge funds are known to engage in the betting-against-beta (BAB) strategy arising from beta-anomaly-related market mispricing. This paper examines if equity-oriented hedge funds time the volatility risk when executing the BAB strategy. We apply realised and downside volatility risk measures to assess the BAB strategy. We show that for top volatility risk timers, older funds tend to be better risk timers, while among the bottom volatility risk timers, younger and larger-sized funds stand out as stronger timers of BAB volatility. We observe that the Long/Short Equity funds show evidence as the strongest volatility risk timers of BAB strategy when the market condition turned bad. This is supported by their other effective timing strategies at the same time, including timing the market sentiment. Our findings provide important references for private investors when selecting hedge funds as risk management is crucial to the success/failure of any investments.

Keywords: Betting against beta; Hedge funds; Volatility risk timing ability (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000667

DOI: 10.1016/j.irfa.2022.102095

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