(IAM Series No 005) Are “Market Neutral” Hedge Funds Really Market Neutral?

Andrew Patton

FMG Discussion Papers from Financial Markets Group

Abstract: One can consider the concept of market neutrality for hedge funds as having breadth and depth: breadth reflects the number of market risks to which a fund is neutral, while depth reflects the completeness of the neutrality of the fund to market risks. We focus on market neutrality depth, and propose five different neutrality concepts. Mean neutrality nests the standard correlation-based definition of neutrality. Variance neutrality, Value-at-Risk neutrality and tail neutrality all relate to the neutrality of the risk of the hedge fund to market risks. Finally, complete neutrality. corresponds to independence of the fund to market risks. We suggest statistical tests for each neutrality concept, and apply the tests to a combined database of monthly market neutral hedge fund returns from the HFR and TASS hedge fund databases. We find that around one-quarter of these funds exhibit some significant exposure to market risk.

Date: 2004-10
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp522_IAM05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgdps:dp522

Access Statistics for this paper

More papers in FMG Discussion Papers from Financial Markets Group
Bibliographic data for series maintained by The FMG Administration ().