Volatility of aggregate volatility and hedge fund returns

Agarwal, V, Arisoy, Y E and Naik, N (2017) Volatility of aggregate volatility and hedge fund returns. Journal of Financial Economics, 125 (3). pp. 491-510. ISSN 0304-405X OPEN ACCESS


This paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time. We measure uncertainty via volatility of aggregate volatility (VOV) and construct an investable version through returns on lookback straddles on the VIX index. We find that VOV exposure is a significant determinant of hedge fund returns. After controlling for fund characteristics, we document a robust and significant negative risk premium for VOV exposure in the cross section of hedge fund returns. We corroborate our results using statistical and parameterized proxies of VOV over a longer sample period.

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Item Type: Article
Subject Areas: Finance
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© 2017 Elsevier. This manuscript version is made available under the Creative Commons CC-BY-NC-ND 4.0 licence: https://creativecommons.org/licenses/by-nc-nd/4.0

Date Deposited: 21 Nov 2016 13:00
Date of first compliant deposit: 18 Nov 2016
Subjects: Performance
Hedge funds
Last Modified: 05 Feb 2024 01:41
URI: https://lbsresearch.london.edu/id/eprint/638

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