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The Journal of Portfolio Management

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Article

Hedging Equity Market Risk in Hedge Fund
Investing: A New Approach

Daniel Hartmann and Dieter G. Kaiser
The Journal of Portfolio Management Summer 2011, 37 (4) 138-151; DOI: https://doi.org/10.3905/jpm.2011.37.4.138
Daniel Hartmann
is a senior quantitative analyst at Feri Institutional Advisors GmbH in Bad Homburg, Germany. daniel.hartmann@feri.de
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  • For correspondence: daniel.hartmann@feri.de
Dieter G. Kaiser
is the director of investment management at Feri Institutional Advisors GmbH in Bad Homburg, Germany, and a research fellow at the Frankfurt School of Finance and Management in Frankfurt, Germany. dieter.kaiser@feri.de
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Abstract

Hartmann and Kaiser argue that investors in funds of hedge funds underestimate the traditional equity market beta of these perceived absolute return investment vehicles. Hence, during times of financial crisis when the correlations of most asset categories with each other increase dramatically, the traditional equity market beta can have an adverse effect on the performance of funds of funds. Because investors in such environments are rarely able to redeem their fund-of-funds holdings due to low liquidity (e.g.,notice and redemption periods or lock-ups) or extraordinary circumstances (e.g., maximum redemptions, gates, and side pockets), the authors posit that the only way to decrease unwanted exposure is through overlay strategies. The academic literature so far has focused on the multifactor approach to estimate equity exposure in hedge fund portfolios. The authors compare different hedging approaches: a pure value-at-risk (VaR)-based approach, a technical market risk signal approach, and a combination of both over the May 2004–September 2009 period using weekly data from an investable hedge fund index. Their results suggest that using a risk overlay system for funds of hedge funds significantly decreases the downside risk of hedge fund investing during economic crises.

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The Journal of Portfolio Management: 37 (4)
The Journal of Portfolio Management
Vol. 37, Issue 4
Summer 2011
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Hedging Equity Market Risk in Hedge Fund
Investing: A New Approach
Daniel Hartmann, Dieter G. Kaiser
The Journal of Portfolio Management Jul 2011, 37 (4) 138-151; DOI: 10.3905/jpm.2011.37.4.138

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Hedging Equity Market Risk in Hedge Fund
Investing: A New Approach
Daniel Hartmann, Dieter G. Kaiser
The Journal of Portfolio Management Jul 2011, 37 (4) 138-151; DOI: 10.3905/jpm.2011.37.4.138
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    • DATA AND EQUITY EXPOSURES
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