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A Time to Scatter Stones, and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking
Author(s) -
Kolokolova Olga,
Mattes Achim
Publication year - 2018
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12169
Subject(s) - hedge fund , incentive , business , fund of funds , sample (material) , open end fund , risk aversion (psychology) , economics , actuarial science , finance , institutional investor , financial economics , microeconomics , expected utility hypothesis , corporate governance , chemistry , chromatography
Analyzing a sample of hedge fund daily returns from Bloomberg, we find a seasonal pattern in their risk taking. During earlier months of a year, poorly performing funds reduce risk. The reduction is stronger for funds with higher management fees, shorter redemption periods, and recently deteriorating performance, consistent with a managerial aversion to early fund liquidation. Toward the end of a year, poorly performing funds gamble for resurrection by increasing risk. It is largely achieved by increasing exposure to market factors, and can be linked to stronger indirect managerial incentives during the second half of a year.