Funds of hedge funds: Are they really the high society for little guys?
Wei Cui and
International Review of Economics & Finance, 2020, vol. 67, issue C, 346-361
Funds of hedge funds (FOFs) have been depicted as a type of conservative vehicle to many institutional and retail investors for accessing hedge fund investment. We challenge this view by investigating the role of tail risk exposure in FOFs. We find that the tail risk exposure determines a fund’s return and significantly influences a fund’s performance over one to three-month horizon. In particular, we find that the marginal extreme losses to one unit change of tail risk exposure in bear markets nearly double the marginal extreme gains in bull markets. This non-linear payoff structure must be evaluated carefully by anyone who wishes to invest in FOFs.
Keywords: Fund of hedge funds; Hedge funds; Tail risk (search for similar items in EconPapers)
JEL-codes: G01 G11 G15 G23 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:67:y:2020:i:c:p:346-361
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