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A Longer Look at the Asymmetric Dependence between Hedge Funds and the Equity Market

Published online by Cambridge University Press:  31 March 2010

Byoung Uk Kang ,
Francis In ,
Gunky Kim  and
Tong Suk Kim
Byoung Uk Kang
Affiliation:
School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong. afbkang@inet.polyu.edu.hk
Francis In
Affiliation:
Department of Accounting and Finance, Monash University, Clayton, VIC 3168, Australia. francis.in@buseco.monash.edu.au
Gunky Kim
Affiliation:
School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia. gkim@uow.edu.au
Tong Suk Kim
Affiliation:
KAIST Business School, KAIST, 87 Hoegiro, Dongdaemoon-gu, Seoul, 130-722, Korea. tskim@business.kaist.ac.kr
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Abstract

This paper reexamines, at a range of investment horizons, the asymmetric dependence between hedge fund returns and market returns. Given the current availability of hedge fund data, the joint distribution of longer-horizon returns is extracted from the dynamics of monthly returns using the filtered historical simulation; we then apply the method based on copula theory to uncover the dependence structure therein. While the direction of asymmetry remains unchanged, the magnitude of asymmetry is attenuated considerably as the investment horizon increases. Similar horizon effects also occur on the tail dependence. Our findings suggest that nonlinearity in hedge fund exposure to market risk is more short term in nature, and that hedge funds provide higher benefits of diversification, the longer the horizon.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 3 , June 2010 , pp. 763 - 789
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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