Performance implications of hedging with industry ETFs

Yigit Atilgan, K. Ozgur Demirtas, A. Doruk Gunaydin and Mustafa Oztekin

Global Finance Journal, 2024, vol. 61, issue C

Abstract: Extant research documents that hedge funds which bet on positive earnings surprises manage their sector risk by shorting industry exchange-traded funds (ETFs). We add to this literature by evaluating the performance of a hypothetical hedge fund that can anticipate positive earnings news. We construct return series for a naked strategy that only takes long stock positions and a hedged strategy that also holds short positions in industry ETFs around earnings announcements with positive content. Our main result is that hedging with industry ETFs improves fund performance based on various reward-to-risk ratios. This finding holds in various equity subsamples and both strategies tend to perform better among riskier stocks. Hedging with industry ETFs boosts fund performance compared to hedging with a broad market index.

Keywords: Exchange traded funds; Risk management; Performance evaluation; Hedge funds (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:61:y:2024:i:c:s1044028324000620

DOI: 10.1016/j.gfj.2024.100990

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