 Bear factor and hedge fund performanceThang Ho, Anastasios Kagkadis and George Wang Journal of Empirical Finance, 2025, vol. 82, issue C Abstract: We find that hedge funds that have low (negative) return covariance with the return of a bear spread portfolio (i.e., Bear factor) after controlling for the market factor, earn significantly higher returns in the cross-section. The return spread does not reflect bear risk premia; instead, it represents a low risk-high return relation. We decompose the Bear factor into different components to identify the one driving the bear beta effect on fund performance and show that the return spread can be attributed to the differential ability of low bear beta funds to reduce their market exposures when the market declines and the VIX increases (i.e., downside timing). Further analysis suggests that these fund managers are more skilled at selling overpriced insurance during volatile market periods. Overall, we propose a simple option-implied predictor of hedge fund returns and unravel a novel economic mechanism that associates the Bear factor exposure with fund performance. Keywords: Hedge funds; Bear factor; Bear beta; Tail risk; Downside risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:82:y:2025:i:c:s0927539825000337 DOI: 10.1016/j.jempfin.2025.101611 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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