On the High-Frequency Dynamics of Hedge Fund Risk Exposures




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    • 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.


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.