Patton is with Duke University and the Oxford-Man Institute of Quantitative Finance. Ramadorai is with Saïd Business School, Oxford University, Oxford-Man Institute of Quantitative Finance, and CEPR. Acting Editor: Jennifer Conrad. We thank Alexander Taylor and Sushant Vale for dedicated research assistance and Nick Bollen, Michael Brandt, Mardi Dungey, Jean-David Fermanian, Robert Kosowski, Olivier Scaillet, Kevin Sheppard, Melvyn Teo, and seminar participants at Fuqua School of Business, the Oxford-Man Institute Hedge Fund Conference, the CREST-HEC Hedge Fund Conference, the 2010 SoFiE annual conference, Lancaster University, the University of Tasmania, and the 2011 Western Finance Association conference for useful comments.
On the High-Frequency Dynamics of Hedge Fund Risk Exposures
Article first published online: 7 MAR 2013
© 2013 the American Finance Association
The Journal of Finance
Volume 68, Issue 2, pages 597–635, April 2013
How to Cite
PATTON, A. J. and RAMADORAI, T. (2013), On the High-Frequency Dynamics of Hedge Fund Risk Exposures. The Journal of Finance, 68: 597–635. doi: 10.1111/jofi.12008
- Issue published online: 7 MAR 2013
- Article first published online: 7 MAR 2013
- Accepted manuscript online: 26 NOV 2012 11:32AM EST
- Initial submission: April 2, 2010; Final version received: October 15, 2012
We propose a new method to model hedge fund risk exposures using relatively high-frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than in the risk exposures of the underlying assets, are the main drivers of hedge funds’ risk exposure variation.