Regime-switching betas for hedge funds returns

Abstract

From the lately 1990s hedge funds have been object of intense academical research. After the financial crisis of 2008 and the disappearance of many funds, the interest has gradually faded. This work aims to review the current state of the hedge fund industry. In the introductory section, different statistical and regression analysis are performed on hedge fund indices and show the persistency of biases (i.e. selection and survivorship). A seven-factors ABS model is then applied to give further evidence. However, risk exposures of hedge funds to various risk factors are not constant in time. Therefore, the central part of this work is devoted to the implementation of the regime-switching beta model proposed by Billio et al. in 2010. The model allows to study the dynamic risk exposures of hedge funds in different regimes of the market (up, down, and tranquil). Investors and regulators can gain insightful information on where hedge funds are putting their bets to react accordingly.