Hedge Fund Performance in Bull and Bear Markets: Alpha Creation and Risk Exposure

Abstract

This article investigates whether hedge funds create abnormal risk-adjusted returns, during both bull and bear markets. The model applied is an extended multi-factor model, using a dataset consisting of hedge fund return series with data from a 15-year period ranging from 1994 to 2009. The whole set, as well as bull and bear subperiods, has been analyzed. The authors apply a slightly different model from that used in previous studies and use a comprehensive database that includes the recent financial crisis. A limited amount of the hedge fund literature distinguishes between performance during bull markets and bear markets. The authors find that most hedge fund strategies reduce their exposure to the equity markets during adverse market conditions and invest more in commodities. The inclusion of global macro and managed futures funds in an investor’s portfolio offers a good hedge for bear market conditions.

TOPICS: Fundamental equity analysis, commodities, analysis of individual factors/risk premia